Qode Advisors' Rishabh Nahar suggests that while the first-quarter earnings season may look volatile, business fundamentals are largely intact. He advises investors to prioritize companies with strong pricing power in sectors like telecom and refining, while remaining cautious about input-heavy industries like autos and paints facing cost pressures.
What Happened
Rishabh Nahar, co-founder of Qode Advisors, recently described the current fiscal quarter as "noisy but not broken." This means that while headline numbers might fluctuate due to short-term market conditions, the underlying business quality for many companies remains solid. The expert urges investors to avoid the temptation to time the market based on temporary fluctuations and instead stay invested in businesses with strong fundamentals.
Where to Find Pricing Power
The key factor for investors this quarter is identifying companies with "pricing power." This refers to a company's ability to raise the prices of its products to cover rising costs without losing customers. If a business cannot do this, its profit margins are likely to shrink when input costs, like crude oil, increase. According to the analysis, sectors such as telecom, refining, and base metals are currently showing strong earnings that have exceeded expectations. This momentum often tends to carry forward for one or two quarters.
Sectors Facing Margin Pressure
Industries that rely heavily on crude oil imports face a more difficult path. Sectors like automobiles, aviation, and paints could see their profit margins squeezed if they are unable to pass on higher raw material costs to consumers. While factors like high oil prices and a weaker rupee create a supply-side shock, it is important to distinguish this from a collapse in demand. Data suggests that overall consumption demand remains relatively steady, even if cost pressures persist.
The Auto and Power Shift
The auto sector is undergoing a structural change, partly due to the impact of GST adjustments on two-wheelers and entry-level vehicles. However, the expert suggests that component makers (ancillaries) may offer a better way to participate in this recovery than Original Equipment Manufacturers (OEMs). This is because ancillaries are often better positioned to capture volume growth without being as directly hit by certain cost inflation factors. In the power sector, transmission companies are showing clear signs of expansion, though investors should monitor the risk of delays in executing these projects.
Healthcare and Small-Cap Outlook
Regarding the healthcare sector, current stock valuations appear expensive, suggesting there is little margin of safety at present. Investors might need to wait for a correction or a drop in prices before finding value. For mid and small-cap stocks, recent pullbacks in stock prices appear to be driven by liquidity issues rather than structural problems. Investors are advised to be highly selective, focusing on companies that can demonstrate strong earnings growth to justify their current valuation multiples.
What Investors Should Track
Going forward, the most important monitorable is how individual companies manage their profit margins in the face of rising input costs. Investors should watch for management commentary on their ability to pass on costs. Additionally, monitoring the execution of capital-intensive projects in the power sector and checking if valuations in the healthcare space align better with actual earnings growth will be essential.