Rahul Shah on 4 sectors to invest in & 2 to avoid in 2023

“Post results, in another 15-20 days, we will get a better outlook and it looks like financials will roar again; IT will do well in select pockets and thirdly, in the consumption theme and select few auto names we have seen a good correction. This offers a good opportunity and these sectors might continue to do well in 2023,” says Rahul Shah, VP, Equity Advisory, MOFSL.

2022 has been a year when India definitely showed outperformance with a lot of sector churn and a lot of fresh sectors coming to the fore. What do you think 2023 will bring in? Which are the sectors and themes to be on?
We saw a seesaw ride in 2022 and I think we are just back to square one but if you look at it, there have been sectoral and stock specific opportunities in 2022. I feel this will continue this momentum and the sectoral momentum will continue. What we saw in 2022 was outperformance by financials and underperformance by IT and pharma and some pockets of FMCG.

In 2023, coming to financials, the commentary by most bank managements have been strong and continue to roar in 2023 as well. The momentum might continue on financials.

In the case of the IT pack, post Q3 numbers, people will start discounting for the near term future and people will start looking for the broader picture. Momentum should be back in IT in 2023. From the valuation perspective, IT looks quite interesting.

Post results, in another 15-20 days, we will get a better outlook and it looks like financials will roar again; IT will do well in select pockets and thirdly, in the consumption theme and select few auto names we have seen a good correction. There has been at least 10-12% correction in a lot of two-wheeler and four-wheeler names but passenger and commercial vehicles should continue to do well. This offers a good opportunity and these sectors might continue to do well in 2023.

Going into the New Year, what are some of the pockets that you may be avoiding just going by the returns. IT has been a big underperformer, pharma index has not quite performed and real estate has shaved off 11-12%.
I have been bearish on one sector – the new age stocks for quite some time. I do not think one should look at that pocket. Some people may get tempted by the price correction but I still believe that this sector should be avoided.

Secondly, the market is looking at places with valuation comfort. That is why we saw PSU names moving up quite substantially in the last quarter of the year. And we saw that most of them moved up 20-30% and in a few select cases more than 50%. I think the stocks at a higher valuation to the PE will get rerated over there.

I feel people will continue to chase value and they will continue in pockets with valuation comfort. That is something one should avoid in 2023.

What is your view on the entire metals index? What are your top recommendations? Rahul Shah: We have had a decent correction in most of the metal stocks. I think steel still remains a good bet from here. Within that, Tata Steel offers great value in terms of valuations and after the removal of export duty, we have seen the momentum building up in steel stocks like JSW and Jindal Steel where we have not seen any momentum picking up.
So I think valuation comfort is there at this juncture in Tata Steel. The risk to reward would be quite favourable getting long on Tata Steel. Second, among aluminium stocks, Hindalco looks quite attractive vis-à-vis the kind of valuations it is trading at now. I feel these two stocks offer a good value in terms of a metal play and could give 15-20% kind of a trade, but not beyond that.

What about these platform companies? In 2022, a lot of factors were working against the companies but most of that is out now. Do you expect it should be a one-way up move for all of these platform companies or will the consolidation continue?
What matters is valuations and we have seen the nervousness of the investors regarding these stocks. Among them, Zomato offers a value proposition but investors should have a five year horizon from here to look at it. So if they have patience for five years then yes, the platform companies like Zomato or maybe like PB Fintech, which offers a unique proposition, should outperform; but the most important requirement at this juncture is patience and the valuations they are trading at. It could only be a bounce back if you want to play it for near term but for a longer term, a lot of other opportunities are there. So no need to get in these stocks at this juncture.

What is the outlook on real estate counters? Is there merit in betting on some of the real estate players given that the kind of commentary we have been getting seems to be fairly optimistic by way of a pick up in demand?
I agree with you. After 2014, I think it is one of the best years that we have seen. We have been interacting with a lot of real estate promoters and the companies and we get to hear that the interest rate hike has been a near term phenomenon but the mood of the buyers still does not reflect that.

Usually the investors and the markets think in an inverse proportion. When we see the interest rate going up, we think housing demand will go down but it is not the case this time. That is what we have been hearing from most of the companies. Obviously, the recent correction in the stock has been quite good. A lot of stocks have corrected from their recent highs.

We need to look at the plays where the demand is still robust. One clear winner is obviously the Bangalore market. Both the housing market as well as the commercial markets looking quite strong over there. Both Prestige and Brigade offer a good value proposition from here.

Secondly, overall holistically in the Mumbai region, Macrotech Developers looks quite interesting. We need to select the pockets vis-à-vis the kind of value they are offering in terms of the stocks at this price.

In auto, TVS has emerged as the top within that basket. How are you cherry picking within the auto and auto ancillary space?
In auto, passenger vehicles offer a great value preposition. We have been interacting with the management and what we have got to hear and what we see also is that Maruti has emerged a good value at this juncture. The stock has corrected 10% and what we are seeing is the good booking run up in the top two brands with new launches of Grand Vitara as well as the Brezza were we have a waiting period of six months or so.

How should one play this entire capex theme? How would you look at betting on the manufacturing theme as a whole in the country?
The capex theme has been there in a few pockets. A clear winner is cement. Post the Ambuja deal, we have seen that industry getting into this big thing so cement as play where we will see the capex coming back in that space. Secondly, in few capital goods as well we have been seeing good interactions, things coming back into play so these two sectors remain strong which will continue going forward also that is what it looks like.