Amid the rising interest rate scenario, brokerage firm Kotak Securities prefers to focus on companies with high pricing power and lower debt. It believes that the central banker’s realignment of interest rates and liquidity impacts valuations.
With an objective to tame inflation, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in May unanimously decided to hike the repo rate by 40 basis points (bps) in an off-cycle meeting. There are expectations that the central bank may further decide to hike interest rates in the upcoming MPC meetings.
CPI in April was 7.79 per cent and WPI was 15.1 per cent. The key drivers were – transport, fuel, vegetables, oil, spices and footwear – driven by indirect effects of the higher oil price impact on fertilisers, freight, derivatives of crude, food prices among others.
“Higher interest rates and the reduced purchasing power are likely to affect demand as well,” Kotak Securities said in a report.
Domestic equity markets underperformed in May with NSE Nifty and BSE Sensex falling nearly 3 per cent. This was largely factoring in higher inflation expectations amidst rising crude oil prices. However, volatility remained high with markets reversing some losses by the end of the month.
Kotak Securities expects inflation to have peaked but to remain sticky at an average of 6.4 per cent in FY23 (7-8 per cent in the next 5-6 months) and exit in Q4FY23 at 4.6 per cent.
“Despite the fiscal support, crude remains at an elevated level, with upside risks especially as incremental demand in China rises. We would monitor the geopolitical improvements that would increase crude supply. Lower oil prices augur very well for the Indian stock’s earnings and valuation,” the brokerage said. At present, Brent crude is hovering at $115 per barrel in the international market.
Considering the present market scenario, Kotak Securities is bullish on Aegis Logistics (Fair value: Rs 300), Century Plyboards (Rs 670), JK Paper (Rs 400), IRB Infrastructure (Rs 315), Suven Life Sciences (Rs 630) and IndiaMart InterMesh (Rs 6,000) with an upside of up to 43 per cent.