Markets Belying Geopolitics, Margin Pressure: Kotak AMC's Harsha Upadhyaya

The ongoing geopolitical crisis weighed on India Inc.'s margins in the fourth quarter of the just-ended fiscal as well as the first three months of FY23 even as the market appears resilient, according to Kotak Mahindra Asset Management Co.'s Harsha Upadhyaya.

“The last few weeks have been very adverse from a macroeconomic point of view, given geopolitical issues and commodity cost pressures have been only increasing. We have also seen most central banks turning more hawkish than the market consensus was,” the president and chief investment officer (equity) at the fund manager told BloombergQuint's Niraj Shah in an interview. “Indian markets have been quite resilient but from an earnings front, the impact of such events has already been visible in the March-quarter results.”

The “bigger and more adverse impact” would be seen in the first quarter of the fiscal through March 2023 because “we have seen a sharp [price] increase of 20-30% across commodities and it's going to be very difficult to really pass on all of that to consumers”. And even if some of the companies are able to do so, the worry on demand sustainability remains, he said.

Also, beyond a level, liquidity is not going to help markets and fundamentals have to really support the markets, Upadhyaya said. “The balancing act with the domestic investors performing to counter the selling of FIIs is not something that is sustainable for long if the fundaments aren't accretive,” he said. “We have a serious situation now where over the next couple of quarters if commodity prices remain at these levels and keep putting pressure on margins, then you could have a situation where there will be earnings revisions on the negative.”

FMCG Valuations

As profitability of all things keeps growing weak, Upadhyaya said he would not invest at the currently overpriced valuations in the fast-moving consumer goods sector. “There must be a significant correction in valuation for us to re-evaluate or there has to be a positive change in fundamentals backing the valuations.”

“At this point in time, FMCG, among other sectors, is suffering from commodity price inflation-led margin pressure… then there would be pressure on demand, as it has not been so strong that you will be able to pass on all the costs,” he said. “So, FMCG is one of the few pockets where we are not so comfortable because the current level of the valuation may not hold up if there is a nice revision on the downward side.”

Watch the full interview here...