We usually do not recommend any specific sector because we believe in a well-diversified portfolio across industries. It is also difficult to predict which sector will perform well because there are far too many variables at play, making crystal ball gazing difficult. However, if we analyze the growth figures of various companies across sectors and industries after Q2 FY2023 results, some do stand out. Please read this as informational input and not as targeted investment advice.
Agrochemicals & Fertilizers
Agriculture is a core sector, and companies in it will do well, but it is also a tough sector because of tight government regulations. As of this quarter, we are seeing good YoY growth and EBIT growth in the companies we are tracking. Given the trend in falling raw material prices, the margins should slightly expand as well. The sector over the last 3 years has seen a steady double-digit (12%) growth in annual revenues, which is very impressive. EBIT growth has been higher, at 19%. This has been aided by a good monsoon in recent years.
BFSI
We have seen the BFSI sector deliver a 12% revenue cagr and 33% profit cagr over the last three years. This trend ought to continue over the next couple of years if earnings growth in India stays above that of other global markets. Chemical is a sector that has seen significant CAPEX investments that ought to bear fruit. More than sectors, we believe in specific companies that meet our investment philosophy.
IT
This is the largest sector contributing to the country’s earnings (ex-oil and gas). Wage pressures seem to be easing, and margins are stabilizing. Attrition also seems to have stabilized. Yes, there is a lot of talk about the US recession and how jobs in the US might be getting axed. However, this might result in some offshore work coming to India. Over the long term, the sector will continue to do well.
Indian IT vs NASDAQ
The NASDAQ index has corrected by nearly 30% both YTD and on a one-year basis. The Nifty IT index, on the other hand, has corrected by 24% YTD and just 16% on a one-year basis. This shows a significant performance difference over a one-year basis. Over a five-year period, the Nifty IT index has returned nearly twice as much (163%) as the Nasdaq (83%). These data clearly show that the returns have not mirrored each other.
The Nifty IT index is dominated by IT services companies whose fortunes are linked to a broader market than what is represented by the NASDAQ index. They draw their revenues from the entire spectrum of the economy of not just the US but also the rest of the world. They also thrive on large outsourcing and maintenance contracts, that are not necessarily linked to bleeding-edge technologies. NASDAQ, on the other hand, is more ‘bleeding edge and in fact has some blood on its shirt, due to the relentless slaughter of growth stocks earlier this year. Now the big FANG guys—Facebook, Meta, and Amazon are themselves getting shot, and there is no reprieve.
The business outlook for IT companies is steady but not great. The Fed’s tightening of interest rates has been the tightest compared to previous course corrections. This could have an impact on Indian IT firms if there is a massive correction in the US. They are already running at lower margins and are weathering the talent crunch that happened just a few months ago. So in relative terms, we think IT stocks are likely to do well relative to the Nasdaq, keeping aside the impact of a prolonged recession in the US.
Other Sectors
Sectors allied to construction, such as paints, electrical equipment, and pipes, are likely to benefit given the infrastructure push in the country. Consumer and FMCG will continue to be defensive plays. The automobile sector has been a laggard and might surprise us.
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