Can Asian Paints & Titan continue to outperform? | Economic Times

Some pockets of consumption, especially discretionary consumption, may take longer to come back, says Shibani Sircar Kurian, Head of Equity Research, Kotak Mahindra AMC, in this interview with ET Now. Edited excerpts: The market has been surprisingly resilient. Is there a merit in believing that the earnings surprise will continue because now the demand indicators are looking mixed?In the last two quarters, a significant amount of earnings upgrades took place. The numbers in this quarter have been pretty much in line with expectations and so there has not been much of change in earnings estimates. The impact of slowdown and lockdowns will be seen in Q1 and so the pace of earnings upgrades have started to dry out. Overall, the consensus earnings is now in the range of 32-35 per cent for FY22. There will be some moderation but we will still see a decent earnings cycle.From an economic growth perspective, there has been an impact but not as sharp as what was seen last year. As vaccinations start to pick up and lockdowns get lifted, the economic trajectory will also improve. It may not be a sharp V-shape recovery like you saw last year but the impact itself was not as deep. It seems like disinvestment is gathering steam once again. Do you think that it is time to invest in some of these disinvestment-bound PSU stocks?The PSU pack it is not a homogenous one and so you will have to look at each business separately. As a theme, disinvestment is important. While there could be some delays in the near term, disinvestment theme does not go away. Of course, valuations have been extremely beaten down. We are approaching PSUs in a stock specific way. We are looking at three angles - disinvestment trigger, improvement in fundamentals and valuations. So we have exposure in PSU names like an oil marketing company, power utility, etc.Are you looking at buying IT stocks now?Some IT midcaps have outperformed the index and their valuations are stretched. There was a significant visibility in terms of order book and growth. In the last few quarters, growth picked up quite considerably while there were some worries about margin pressures. Of course, margin pressures can be offset by higher growth. There are levers in terms of improvement on the utilisation and offshoring aspects which can help sustain margins at least for some time. So as long as growth continues, it is possible that some of these valuations can hold up. In the IT midcap pack, on both services and product side, there is very little room for error now. If there is any kind of miss in terms of growth outlook or in terms of management commentary, especially on the revenue growth side, then (keep in mind that) valuations are at the upper end or even higher than their long-term average multiples. We have a preference for larger names where there is some degree of comfort on valuations. These larger names are also seeing pick up in terms of revenue growth momentum. Their order books have also been quite good. The deal momentum has improved, large deal wins are coming through and that will result in narrowing the gap in terms of the revenue growth trajectory with midcap companies. Across the board in our portfolios, we have exposure in IT names. However, do remember that as a sector IT has done extremely well over the last one year. Across the board, the valuations are at the upper end in terms of long-term average multiples.Do you think stocks like Asian Paints, Colgate and Titan can give 10-12% returns from these levels for the next couple of years?Some of these consumer companies have been compounders over a period of time. Unlike in the previous wave where the impact of Covid was restricted to a certain segment of the population, this time it is across the board - bottom of the pyramid, middle class, upper middle class and the rich. The consumer sentiment may get impacted for some time. While the overall economic impact has been shallower than what it was last time, the recovery per se also will be somewhat of a U-shaped recovery, especially where discretionary consumption spend and overall consumption is concerned. We expect that by the second half of the year, you will get back to a normalised run rate on overall economic growth but there could be some pockets of consumption, especially discretionary consumption, which may take longer to come back.In most of the consumer pack, valuations are not cheap. Therefore, our preference for defensives is more towards pharma and largecap IT stocks in our portfolios. We are neutral to slightly underweight where consumer names are concerned in our portfolios.