Despite global headwinds driven by oil price fluctuations, currency movements, and geopolitical tensions, DSP Mutual Fund's CIO Anish Tawakley believes India's domestic economic fundamentals remain robust. According to his conversation with ET Now, the economy is well-placed with picking demand and spare capacity, creating favorable conditions for selective investing. Tawakley emphasized that while valuations are no longer cheap, the broader market setup continues to favor domestic cyclicals, particularly in financials, cement, automobiles, and capital goods sectors. As per ET Now, he stated that the view on the market has to follow the view on the economy, noting that while there is some stress due to West Asia situation, overall the economy is very well placed. The latest analysis from Economic Times reinforces this view, highlighting that the Indian economy shows signs of robustness with increasing demand and available spare capacity, making sectors like financials, cement, and automobiles attractive for selective investments.
On the financial sector, Tawakley clearly differentiated between segments, cautioning against capital market-linked plays while favoring banks and insurers. Regarding PSU banks, he suggested that the recent outperformance trade has played out well, but would not put fresh money into that trade as credit costs are expected to moderate. He significantly prefers large private sector banks, noting that private banks have underperformed and now appear more attractive on valuations. The preference for private banks stems from their stronger fundamentals compared to PSU counterparts, with Tawakley stating that private banks have underperformed quite a bit and therefore valuations are far more palatable. He added that a lot of the growth came because the PSU banks were sitting on very low LDRs, so they were able to ramp up their LDRs and therefore lend more because they had surplus deposits, but now LDRs have kind of peaked and from here expecting further moderation in credit costs would be unlikely. However, caution is advised with PSU banks, which may face challenges due to rising interest rates and bad loans in the current environment.
Tawakley downplayed inflation concerns, calling the current price increases transitory and one-off step-up in prices rather than recurring inflation. According to his analysis, this inflation is a little bit misunderstood. This is not recurring inflation firstly. It is a one-off step up in prices which is different from recurring inflation. He explained that recurring inflation happens when demand is very strong, that is not the case here. According to ET Now, he expects that once this oil price hike has been passed through and those numbers are in the base, the inflation picture will moderate. However, he expressed caution on FMCG margins, stating that companies are not investing enough in new product launches, marketing, and advertising, allowing lower-end competitors to take market share. He remains constructive on autos but cautious on FMCG, expecting these companies to reset their margins downward and invest more in business development. The latest analysis from Economic Times confirms that inflation is a concern, but it is expected to be transitory, though it could impact sectors like FMCG which are facing margin pressures.
On private capex, Tawakley argued that investment always follows capacity utilisation, emphasizing that four heavy capex sectors - cement, power, steel, and auto - have all added capacity. He pointed to ongoing investment in core sectors as evidence of continued capex activity, stating that you look at which are the heavy capex sectors in the economy and see whether they have done capex or not. Cement has added capacity, power has added capacity although power has added capacity with lower spending because renewable capex is more capital efficient. Steel has added capacity. So, why do we say that there is no capex? Regarding IT services, he struck a cautious tone, noting that Indian listed IT companies are not doing well while overall IT services exports remain healthy. The structural shift includes global banks setting up their own shops as Global Capability Centers (GCCs), creating new competitive dynamics in the industry. He added that what we are seeing is a change in the competitive environment… As these global banks, the users have become more and more comfortable with India, they are setting up their own shops as GCCs and that is the new reference cost base there. He also flagged weak hiring trends as a concern, noting that if you look at the Indian IT companies, the staff count numbers are still flattish at best, so that does not suggest to him that the companies themselves are particularly confident about demand.
