IT sector showing signs of bottoming out; healthcare to grow over 12 months: Vinit Sambre

Vinit Sambre, Head-Equities, DSP Mutual Fund, says as far as earnings are concerned, over the next one or two quarters overall, a moderation is expected. The banking sector which has been growing at upwards of 20-25% will come off at around 14-15%, but that itself is a decent growth. Purely from the earnings perspective, the engineering capital companies should show strong earnings momentum given their order inflows have been good and only thing is that the valuations there are pretty high and one has to be slightly more careful.

What is the outlook when it comes to hospitality and retail, given that a lot of companies within these spaces have been going gung-ho? There are favourable demand-supply dynamics when it comes to hospitality. But has the story already played out or is there still room to go for both retail and hospitality?
Vinit Sambre: Somewhere we are looking at the segment reaching towards the top end, both in terms of their business metrics and in terms of the valuation. Hence, we would be slightly more careful and we would like to look at the segment at more reasonable price points. While we have a decent and a reasonable good long-term view, at the moment we have reached a top-ish kind of a scenario both on the business front as well as on the valuation front. So, we would like to remain a bit more cautious around these segments.

I know it is not your style of investing but if you had to take a tactical bet around budget, what would that be? Is FMCG something that comes to mind given the valuations are a lot more comfortable, plus of course, rural recovery is high on the agenda?
Vinit Sambre: Yes, so while incrementally we are watching the FMCG sector from the exact viewpoint that you mentioned, and maybe there could be a case where during the budget these announcements could favour these companies, at the same time our long-term thought always suggests that the consumer discretionary as such has, in the long run, outperformed the FMCG companies because FMCG companies, in general, have reached very high penetration and the growth matrix maybe moves up from a low-single-digit to high-single-digit, but beyond that then again one will have to re-look at the valuations.

So, from a long-term view, we have been more positive around consumer discretionary, and within discretionary maybe auto, auto ancillary, QSRs, and garment companies. So, these are the segments in which we have decent exposure.

Do you believe that we can see scope for earnings growth within select sectors like say IT or even the autos, and FMCG companies, which are the sectors that will be promising amongst the lot?
Vinit Sambre: So, as far as the earnings are concerned, I sense that over the next one or two quarters overall, a moderation is expected. The banking sector which has been growing at upwards of 20-25% will come off at around 14-15%, but that itself is a decent growth. I would say that purely from the earnings perspective the engineering capital companies, should show strong earnings momentum given their order inflows have been good and only thing is that the valuations there are pretty high and one has to be slightly more careful.

As far as the IT sector is concerned, it is showing signs of bottoming out from a flat to very low earnings momentum. Maybe the stocks will pick up some bit and go to the high single-digit range. Over the next two quarters we see that the sector should come out of the low growth phenomenon as our expectation and healthcare as I said is likely to show a decent growth matrix over the next maybe one year or so. So, these are some of our estimates around these segments.

Some sectors tend to do very well when you catch the theme. For example, if you bought into defence stocks 10 years ago you did not make money, but if you bought into defence stocks post-COVID or railway stocks post-COVID, that is where the incremental delta has come in. So, is there a standout theme that you would like to bet on? It looks like a small theme right now, but it has the potential to become big?
Vinit Sambre: Frankly when we scan across different categories, and segments across market capitalisation, because of the kind of flows which we have seen in the markets over the last three years, most of the themes seem to be either reasonably valued or richly valued. It is not that any specific themes one is seeing reasonable level of valuations that is number one.

Now, the other aspect from the returns perspective is where in the business cycle are these themes? So, maybe the valuations could be reasonable, but the business cycles could be at the lows and hence it is still okay to catch some of these at the juncture today. So, from that perspective when I look at the business cycles, I believe the specialty chemicals are at a low cycle and some data points are suggesting that there could be signs of recovery when we look at the global agrochemical companies and their commentaries out there.

Similarly, the IT sector as I mentioned is at the business lows and as the scale-up in the growth matrix happens, maybe we could see some bit of expansion going forward. So, likewise, the segments which are connected in some form or fashion to the agri market, so agrochemicals have been lacklustre for the last two to three years maybe we could see some bounce back. We have already seen some catch-up, but there is some more room which is left out there, and the segments that are more focused on let us say agri, the two-wheelers, entry-level all of those could be the ones where relatively one can look for some outperformance heading into the next one year or so.

When will IT start turning? Companies are telling us that the AI business now is increasing for them. Are we at the turn for IT?
Vinit Sambre: AI is still debatable and the verdict is still not out, but I sense that as we saw in the case of the digital and the cloud-based businesses which the companies did catch well, even in the case of AI, because the scope of work is going to be huge, every company would want to have some kind of AI tools, I think the outlook should be positive as far as IT sector is concerned and for these companies as they have done in the past, the new technology capture should be better.