Home NewsStock Market News Further correction IT stocks unlikely; prefer largecap stocks for short term: Vinod Nair

Further correction IT stocks unlikely; prefer largecap stocks for short term: Vinod Nair

by WOOWinvest
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Further correction IT stocks unlikely; prefer largecap stocks for short term: Vinod Nair


The collapse of international commodity prices, like copper, steel & aluminium, by 30 per cent, 37 per cent & 37 per cent from their respective 52-week highs is the most fortunate development for the Indian market.

The domestic economy is consumption-based; hence, high input costs have a detrimental effect on the broad market and vice versa. Especially, when the crude prices softened this week by about $10, it added an extra twist to the momentum.

Importantly, the extent of FIIs selling reduced during the week by about 50 per cent. The DIIs have been absorbing about 65 per cent of the FIIs selling during the year. If this inflow trend continues and retail starts chipping in, it will have a positive effect on the market. This week, the domestic market was also supported by banking stocks as provisional business data for Q1 indicated strong credit growth.

Though the domestic market is benefiting from the correction of commodities, it is a concern for the global bourses due to fear of a recession. The current gain of the Indian market could be a setback to the world economy, leading to muted earnings growth, along with tightening policy. Investors should remain cautious due to the possibility of fizzling out of this rally in the medium-term (3 to 12 months) because of limited upside in the expansion of valuation.

In the short term, this rally can get stronger or weaker based on the outcome of the FOMC meeting, which is scheduled for July 26-27th. Today, the market is wondering if the Fed will increase the rate by 50 bps or 75 bps. If the policy continues to be aggressive, this rally can’t be sustained, the consensus is 75bps. If the FOMC respects the fallout of commodity prices and anticipates moderation in future inflation and high risk of recession with a change in the tone of policy, it will have a positive effect on the market.

The fall in crude prices has boosted the appetite for domestic consumption, speciality chemicals, logistics, tyres, and OMCs stocks. It has a direct reduction in the input cost and improves the margins. Defensive sectors like FMCG can also perform better due to strong cash flow, high governance, dividend policy and stable earnings growth. We presume that inflation has peaked, and supply constraints will further ease in the future while product prices have been hiked.

The distribution of the ongoing monsoon will be an important factor in determining earnings growth in H2FY23. FMCG should be able to outperform compared to the broad market, in short to medium-term.

Q1 results will be the

of the market in the near term. IT stocks have started weak ahead of results as investors prefer value to growth stocks today. Preliminary analysis suggests that revenue growth is expected to be robust due to the high number of deals in the last 2yrs and support from favourable currency movements.

But margins will continue to be under pressure on the back of inflationary wages, supply issues, an increase in travel costs and other discretionary costs. Attriitions will continue to be on the higher side and impact wages. However, IT stocks have corrected, factoring much of these issues. The market will look forward to the management commentary and guidance to decide the future price trend. We don’t expect a further heavy correction in IT stocks. Though performance can be mixed, large caps will be a safer bet in the short term.

(Vinod Nair is the Head of Research at

)

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