The worst in terms of Foreign Institutional Investor (FII) selling and inflation outlook seems to be over now, said Sachin Shah, Fund Manager, Emkay Investment Managers in an interview with Kshitij Bhargava of Further, Sachin Shah believes that the earnings season barring the oil & gas sector was not too bad. He does foresee some risks ahead but largely remains optimistic about the trajectory that stock markets are charting. Here are the edited excerpts.

Inflation seems to be on its way down and FIIs are buying is the only way up for Dalal Street?

We have been saying this for more than two months now that clearly the worst of the inflation seems to be behind us (with most commodity prices cooling off by more than 20%-40%) and in early July we had demonstrated with FII data that even over there the intensity of selling is behind us. The net buying from January 19 to March 21 was Rs 3.31 lac crores, while the net selling from April 21 to June 22 is Rs 2.56 lac crores. The worst seems to be over. So now that the two big challenges, the inflation and intense FII selling are behind us along with very decent Q1FY23 results from most of the sectors probably gives a reason for a decent sustainable bounce over the next few months.

Earnings season is behind us mostly now, what’s your review of the large-cap results?

Clearly, the results were much better than as much they were feared for an earnings cut expected post results. In fact, excluding a couple of large companies in the oil and gas sector, the earnings estimates should largely remain unchanged. The most interesting part of the results was no major evidence of impact on aggregate demand and secondly in spite of some impact on gross margins (due to high RM cost) most of the companies had managed to maintain the operating margins by internal cost efficiencies.

What are the immediate risks in your view? 

We are hearing some slowdown in very selective pockets like building materials, logistics, and exports, but at this point in time the hope is that most of it is very seasonal and should bounce back in the festival season during the next 2-3 months. The other challenge could be from geo-political developments, the China-US tensions. The third worry is about the China slowdown, how deep it could be and its impact.

What sectors should investors bet on? 

We believe the outlook for the Indian economy is on a solid footing, particularly now that the run-away commodity inflation seems to have retraced quite significantly. From that perceptive, we believe Auto & Auto-Ancillary sector, Pvt Sector Banks, Logistics and Telecom sector should do quite well. Even for industries, which are more export facing and where Indian entrepreneurs have proven capabilities of Indian cos in sectors like IT services, Speciality Chemicals, Pharma (CRAMS), Industrial machinery, Textiles and recently electronics there is decent amount of orders flowing to capable companies.