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Geopolitics, crude risk and the IT conundrum: Sridhar Sivaram on why investors may need to stay selective
Speaking to ET Now, Sridhar Sivaram from Enam Holdings said the biggest concern is the potential disruption to energy flows from the Gulf Cooperation Council (GCC) region, a crucial economic partner for India.
“Yes, if at all any of us knew where and how it will end, one is only hoping that this ends fast and it does not prolong for too long because unlike the Russia-Ukraine war which was more in the hinterland and it was literally landlocked, did not affect too many people apart from little bit of European impact. This has impact on crude. I mean, we import almost 50% of our crude from the GCC countries and a large part of our LNG imports come from there. Remittances come from there. So, this has a larger impact if this continues for a longer period of time. So, one would only hope that this gets resolved faster and does not prolong as long. But if it does prolong, then we do have an issue.”
He added that the current situation is unlikely to return to complete normalcy immediately and that energy prices may remain elevated in the near term. “The general view is that this does not prolong for too long and some sort of normalcy will come back. I do not think this will be 100% normalcy. So, it does have an impact. I do not see crude come back to the 60 handle in a hurry. Maybe it will come back once all the production comes back. So, in the short term, it is a negative for India, that is how I would put it. But our markets have corrected. So, I guess a lot of it is already priced in.”
Currency pressure has also become a talking point, with the rupee breaching the 92-per-dollar mark recently. Sivaram believes foreign institutional investors (FIIs) have been reducing exposure to India partly due to better earnings opportunities across Asia. “So, one of the reasons for FIIs selling and in the last 18 months more so is because Asia is going through, I would say, an earnings super cycle. So, this year Korea will have… the market will have a 100% earnings growth. Even the likes of Taiwan will have say 25% to 30% growth and this is broadly the AI related because the chips and the DRAMs are in short supply. But even China earnings growth is somewhere in the 15% to 18% bracket.”
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India, on the other hand, has struggled with slower profit growth over the past year and a half. “So, I think that is the challenge that India has struggled with single-digit earnings growth for the last 18 months. We think that earnings growth for the next year which is FY27 which starts from 1st April right now, we could come closer to the 15% handle, which is a good news. But when you compare it with Asia, when I speak to my ex-colleagues and friends in New York, they say 15 is great but your valuations are 20 times whereas Taiwan, Korea, China are almost at single digit. So, that is the challenge.”
According to Sivaram, the relative attractiveness of other Asian markets could delay a meaningful return of foreign capital to India. “Korea has had lot of volatility, but that market is still up 30% for the year. Year to date it is up 30%. So, those are the challenges we are facing. It will take some time for the FIIs to come back, that is my view.”From a macroeconomic perspective, the broader concern lies in India’s heavy dependence on the Gulf region for energy imports, remittances and trade. Sivaram pointed out that the economic linkages extend beyond oil alone. “It is very difficult to exactly pinpoint what the impact could be. As I said, if this prolongs for more than a month or say two months, then we have a massive impact. The broad view is this does not happen, but we do have an impact. As I said that if we are importing 50% of our crude from GCC, almost 30% or 40% of our LNG comes from this area, 50% of remittances come from this area, so we have multiple macro touch points which come from the GCC countries.”
He noted that even though the conflict involves only a few countries, its economic impact spreads across the entire region. “So, unfortunately this has impacted the entire GCC, that is the sad part that even though the war is between two countries or two-and-a-half countries, it has impacted the entire GCC nation. So, it will be foolish to think that this will have no impact.”
In the near term, companies with exposure to the Middle East may face earnings uncertainties. “There will be significant impact fact in this quarter because number of companies export a lot of reasonable percentage to this region. So, we will have to wait and see how this plays out. But my view is that it will settle down in a quarter’s time. So, I am not saying like this is a screaming buying opportunity or something. You have to be very selective.”
Despite geopolitical risks, Indian benchmark indices have held up relatively well over the past year, although the broader market has been under pressure. Sivaram said headline indices can sometimes mask underlying weakness. “So, actually, the Nifty masks the problem that we have in the broader market. I mean, all of us know that the broader market has seen significant pain. So, the Nifty also has been helped by a few sectors here and there.”
Looking ahead, he believes earnings growth could recover partly because of a favourable base effect. “I do think that the next year we will see 15% growth because we have a very low base effect. We all had single-digit earnings growth for almost six to eight quarters now. So, it does flip because our base is low. So, there is opportunity. I am just saying that one has to be stock specific.”
One sector where Sivaram remains cautious is information technology. The sharp correction in IT stocks has sparked debate about whether the sector now offers value, but he believes structural challenges remain. “So, I have to say that in our own firm, we have differing views and these are my personal views. And I have been very negative on IT for over two years for exactly this reason that the AI impact and my broad view is, it is not like these companies are going to die tomorrow. Their revenues are going to become zero. The terminal value is eroding. So, it is a PE derating event which a lot of people are missing.”
He compared the situation to the transformation seen in the media industry over the past decade. “I give example of the media sector. Go back 10 years and see the large media companies and the view was OTT will not affect them. Are these companies still existing? Yes. Are they making profits? Yes. But the profit growth is flat for the last five years. Their PEs are single digit. So, this is a derating event.”
Sivaram also highlighted the broader implications of the shift towards artificial intelligence for India’s technology sector and employment landscape. “This is a problem not only for the IT sector, it is a problem for the larger employment related stuff because total number of employees in this segment. You are not hiring people. It has a second derivative impact which is much larger.”
While AI has become a major investment theme globally, he believes India currently lacks a clear opportunity for investors looking to participate in the trend. “I do not think we have a clear AI play. I mean, that is the ground reality. No FII is coming to India to play the AI trade. The AI trade as far as Asia or emerging market is concerned is in Korea, Taiwan and their earnings are real.”
For now, the message for investors appears to be one of caution rather than panic. With geopolitical risks, global competition for capital and sector-specific challenges all at play, the market may continue to reward careful stock selection rather than broad-based buying.