It is not so easy to take an economy out of the ICU. For the retail investors, what does tuning in to global cues like Fed tapering mean? What do you make of it?
We have seen markets moving up sharply over the last 18 months on the back of the unprecedented stimulus and the response to the pandemic which gripped the whole world. Now is the time when we say that the economy is doing well. They are trying to bring back the economy from the ICU and trying to get it to walk on its own feet. There will be some issues in the interim, but it is a good sign that we are reaching a stage where the economy does not need the kind of stimulus that the central banks globally are providing.
In the interim, we saw the scare of the second wave, the third wave and the inflation which had become a major issue globally because of the huge pent-up demand. We need to see and understand whether this pent-up demand can sustain and that is what can help the economy sustain the growth momentum over the next two-three years.
So yes, the newer retail people who have entered, need to understand that the withdrawal symptoms from the stimulus need to be taken, digested with a heavy stomach and a lot of strong will. In the interim, traders will have issues with the sharp movements either way. We have seen these kinds of sharp falls even earlier but they have been bought into sharply. While at higher levels, especially on the index side, the Nifty kept struggling at around that 16,000 mark for almost two months. Then we saw a sudden spike managing to break past on the back of good interest in the largecaps. After almost 18 to 24 months, midcaps underperformed largecaps who were the torch bearers. Even on Friday, a lot of largecaps are at their all-time highs, 52-week highs and that is where the market is looking for returns in the near term.
What does it mean for the overall outlook? Does it mean that midcap and smallcaps will not do well? After this sharp rally, some kind of healthy profit-booking needs to take place and that should be the point where retail investors can start looking at accumulating the good quality midcaps for the next two-three years. The rally is not over and it is a good healthy correction which will give entry opportunities to investors who have been waiting on the sidelines. Nonetheless, largecaps would be something which would now take off from here. This has just started.
IT stocks, largely we would divide them into two. One is the mid and small cap IT names and the other is the large cap names – TCS, Infy, etc. Both have rallied. The quantum in mid and small cap names has been much higher. Do you think that all this has been digested when the stock prices quote at the levels that they are right now?
The IT stocks have been consistently reporting strong numbers.Not only that, we have seen record order wins that most of the companies are having right now. In tier I, we saw healthy growth on a constant currency of almost 4.5% for the quarter. What stood out is that the tier II, the midcap IT companies, have been outperforming in terms of growth at about 6% sequential growth in constant currency. That is where the market chases higher growth and leads to a higher multiple. But I think we have not seen these kinds of valuations in a long time for some of these midcap IT names which are trading at almost 30-35 times on a one year forward basis compared to some of the larger tier I stocks which are still a bit on the comfortable side.
So is trading at about 26 times FY23 earnings while TCS is at about 30 times FY23. So While we continue to remain positive, there could be a situation where some of the midcap names which have seen sharp runups could see a time correction of about one to two quarters. Once the valuations become comfortable again, the fresh up move could happen.
In the interim we would prefer some of the larger names like Infosys. It has strong growth; it has been outperforming its peers in the tier I space and still has a comfortable valuation at about 26 times FY23 earnings. We have seen the kind of dividend payout, the buybacks, the comfort in terms of growth and so that is our preferred pick, followed by
which trades at a partly 16 times FY23 mainly on back of a lower growth but that is now picking up and should lead to rerating for HCL Tech as well. In the midcap space, despite high valuations, we would prefer , and L&T Infotech.
