India May Underperform China In 2023, Says Rakesh Arora

As the Chinese economy bounces back from the depths of economic turmoil amid rising Covid-19 cases, India could underperform the country in 2023, says Rakesh Arora, founder of Go India Stocks.

"Since China has been beaten down so much, it has given up, so I think India could slightly underperform China this year," Arora told BQ Prime. However, it'll do much better than the rest of the world, he said.

Calling it a sharp reversal in China, Arora said, "We never anticipated that they would do something like a 180-degree swing." Still, the analyst expectes that the revenge buying in China will not be commodity heavy, as most of the developers in China are either bankrupt or not investment grade.

The stimulus, or liquidity, that the Chinese government is supplying would initially go toward beefing up the balance sheet, Arora added. Property rates have to really climb before investors can jump back in, Arora said.

The housing sector in China will likely pick up in the long term. That is the mainstay for commodity consumption.

Commodity prices are well supported in the near term because of the restocking cycle, which happens before the Chinese new year, Arora added.

Arora said that infrastructure and capex spending are the themes that will be played out in 2023, against the backdrop of India's general elections in 2024.

This is where one should be positioned, he added, saying that his optimism lies in companies and sectors that are geared towards these themes.

Banking will continue to be a 'favourite' into 2023, Arora said. This sector has seen robust credit cycle growth along with lower NPAs, while the valuations are also below the long-term average.

But the current credit growth might result in NPAs five years down the line, Arora pointed out, adding that it is probably time to exit banks that historically have not performed well.

"So maybe it's time to book some profit on those small-time PSU banks and move to large private banks." Private banks would do much better in terms of quality of lending and how they come out of this upcycle, Arora added, saying that the valuation differential is not great anymore for PSU banks.

Arora also added infrastructure companies to his bucket of top bets for 2023. Citing recent data, he said that ordering from India's National Highways Authority of India has started to improve in November and December.

Cement, according to Arora, is also a theme that will gather momentum this year as cement price hikes come in. With energy costs receding and cement prices slated to go up, there is margin expansion that is playing out in cement, Arora said. Meanwhile, demand should be reasonably decent.

"These three sectors look really primed for good performance in 2023."

Metals is also another sector that people are looking at, said Arora, citing India's infrastructure bets and China's revival story. However, the stocks are not cheap, and many of the factors are built in, according to Arora. Metals could see a tactical rally, Arora believes.

Arora believes the 'big move' will come in real estate companies, as their land banks have become highly valuable.

"I think, for real estate, buying real estate play itself and companies with large landbanks could be the way to go rather than just the developers," he said, adding that there is visibility in the monetisation of land prices, which have been jumping.

Some of the client companies, Arora added, are witnessing massive value unlock through their fully paid landbanks. Most of these are now debt-free or close to being debt-free, he added.