We continue to remain positive on auto-auto ancillary pack: Shibani Sircar Kurian

"Earnings delivery has also come through in the fourth quarter where numbers by and large at a headline level have been in line with expectation," says Shibani Sircar Kurian, Kotak Mahindra Asset Management.

We are almost at a new high on the Nifty, almost at a new high on the benchmark indices, which is Nifty 50 and Bank Nifty. What is driving the markets and what is the way forward now after the recent rally?
You are right that markets have been moving. And if you look at the last one month, what we have clearly seen is that India has been standing out from a global perspective, especially where macro parameters are concerned. And that has been one of the key reasons why Indian markets have been very-very resilient and have inched up closer to previous highs.

Earnings delivery has also come through in the fourth quarter where numbers by and large at a headline level have been in line with expectation. And that has also been one of the key factors that have driven markets. Now, from here on, when you look at two key parameters; one is valuations and the second is earnings expectations for 2024 and 2025 in terms of financial year. One is valuations are at about fair value levels so on an absolute as well as relative basis we are at about long term averages.

So valuations are not expensive and neither are they very cheap. And therefore, going into FY24 and FY25, earnings delivery becomes extremely crucial. Our belief is that if you look at consensus estimates for both these years, mid to high teens earnings growth is something that has been factored in.

And this growth is possible given the kind of overall demand as well as growth that we are seeing, especially where domestic facing sectors are concerned.

However, when you look at the broader market and we look at beyond Nifty 50, what we have also seen this quarter and in the last few quarters is that earnings dispersion at a sector level as well as a stock level has been fairly high.
And therefore, when you look at the broader market, there is likely to be dispersion in terms of earnings delivery and therefore stock picking and looking at the sectors in terms of where the earnings growth is coming from becomes extremely important.

We believe that in this market, domestic facing sectors continue to be better placed than global cyclicals and global sectors. And therefore, even in our portfolios, our overweights continue to be industrial capital goods, banking and auto and cement, to name a few, while we continue to be underweight on metals and technology at this point in time.

We were discussing cement stocks. Is there merit in buying cement because commodity prices are down, infrastructure spending is picking up, six-eight months ahead of the election cycle, the entire activity on ground also has to pick up?
Absolutely. So cement has been one of the sectors where we continue to remain positive on. So cement is both a proxy for infrastructure as well as housing construction and both these segments have seen improvement and that is already reflecting through in terms of the volume growth that we are seeing in the sector.

So even in the last quarter, most of the companies have reported fairly strong volume growth. And as you rightly pointed out, typically what we have seen is in the pre-election year, you do start to see pickup in infrastructure activity. And as it is, the policy focus has been towards investment and infrastructure led growth. And secondly, housing market has also started to see improvement. So real estate activity has improved, which is again boards well from a demand perspective. On the margin front, two factors. One, of course, the input cost pressures have come off very-very sharply and that helps in terms of margins. On pricing, pricing has remained largely stable. So of course, going into monsoons and post monsoons, we have to see how the pricing holds up.

But with pricing remaining stable and with input costs coming off sharply, margins are likely to improve as well. And therefore, this is a sector that we believe should continue to deliver in terms of improvement on profitability and remains one of our overweight in our portfolios.

Also the auto space, as competitive as it may be getting, but you know, purely in terms of stock market, there seem to be some standout winners there, right Tata Motors, M&M, etc., at least within the passenger vehicle segment. Wanted to understand how the two-wheeler CVs would come into the fray and investment-wise, what is the space that you are liking right now?
Again, auto as a space is something that we have been positive on for a while. What we have seen in terms of improvement, both in terms of the CV cycle as well as on the passenger vehicle cycle, we believe that this is normalisation of long-term growth post a multi-decadal low that we have seen over the last few years.
So there is still some room for improvement from here on. Now, coming to the two-wheeler segment, the two-wheeler segment had been extremely muted, but now we are starting to see some signs of recovery.

And this is essentially coming through with nascent recovery in demand especially from the rural markets. So the
two-wheeler space is something that we find fairly attractive at this point in time. Also, if you look at from a company-specific perspective, there would be companies that we would want to monitor especially where product launches go. And therefore, the product launch cycle also has a pretty important role to play where the sector goes. A third aspect from a sector perspective is, of course, the margin factor, especially with decline in terms of commodity and input cost pressures. And what we would also need to monitor is the normalisation of the chip availability cycle which should over a period of time aid recovery across the board.

So the auto-auto ancillary pack is something that we continue to remain fairly positive on. And we are looking at players who have a large pipeline in terms of product launches. And the two-wheeler cycle space at this point in time, especially given valuations, also continues to look attractive.