IT stocks have been at the forefront of the recent rally in the market. Among those hopeful for more upside in the pack is Motilal Oswal Asset Management Company's Manish Sonthalia, who believes things are still looking positive for IT shares and one can have an overweight position in the space.
“There is a long runway for growth in IT names including TCS. The demand environment is very soft and supply-side concerns are there. But supply-side issues in terms of increased salary costs, wage hikes and attrition rates are likely to rationalise over the next 2-3 quarters... Valuations are still at mid-cycle levels," said Sonthalia in an interview to CNBC-TV18.
If the runaway for growth is next 3-5 years, why should the multiples contract, he asked.
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Overall Market: Correction somewhere down the line
In the overall market, there is a correction "looming somewhere down the line", said Sonthalia, Head Equities-PMS at Motilal Oswal AMC. “Till that time, it is 'party on, make hay while the sun shines' but there is clearly risk. One needs to be cognizant of the risks prevailing in the markets today," he said.
According to the fund manager, as the market becomes more expensive or moves to even higher levels, it is better to find comfort in the margin of safety stocks across sectors.
He believes some of the more expensive stocks will give way to deployment of capital while some of the more reasonably priced ones -- like energy, refining, PSEs, healthcare, technology, consumer and banking -- will drive the marketcap of the entire market.
The market has apathy towards some of these sectors even though the dividend yields are fabulous, he said.
Here's how some of these baskets have performed in the past one year:
The good old banking
The market veteran believes the highest degree of comfort is in the largecap banking space, which has a "cushion on the net interest income (NII) growth front. Credit growth is likely to pick up in the second half as opposed to the previous second half (YoY). There is positive leverage. I don’t think the slippages, which were a concern on the retail front, are likely to be back significantly in the second quarter."
Private sector banks appear to be very reasonably priced in terms of valuations. He expects earnings growth to come to these lenders. He also sees scope for outperformance in largecap banks but is "not so bullish" on midcaps.
Oil & gas space
Energy prices are firming up globally and as long as there are power disruptions in China, the impact of energy parity is going to be there across energy sources, he said. "It is likely to stay,” Sonthalia emphasised.
In the city gas distribution space, as long as the differential between LNG and petroleum remains as high as 50-60 percent, companies "have the muscle to pass-on the increase cost of gas", he said. With India moving towards a gasified economy as a whole, Sonthalia expects gas to play an important role. "Some of the increases which we are seeing in very moderate way will sustain,” he added.
For the full interview, watch the accompanying video.