Edited excerpts from a chat:
Sensex and Nifty have didn’t beat financial institution FDs within the final one 12 months. Do you assume that more often than not correction is behind us and that the expansion trajectory must be again quickly?
Traditionally long-term returns of fairness as an asset class are a lot superior to banks FDs, brief time period volatility is an element and parcel of fairness as an asset class.
We don’t predict market ranges. What we deal with is valuations which at the moment are in truthful worth zone for giant caps. Small and mid-cap stays costly. Now we have inner mannequin for asset allocation which is used for fairness allocation in a few of our asset allocation methods and that mannequin is suggesting round 65-70% p.c asset allocation to fairness which has moved up by ~ 5% over previous few months.
Market cap of firms is actually the discounted money move of future earnings. It doesn’t change materially based mostly on short-term occasions. What modifications absolutely is the narrative, so shares which had been using on narratives are comparatively extra in danger than these that are backed by stable underlying progress.
Additionally, we have to contemplate the macro shock by way of sharp enhance in US tariffs on items and its impression on international progress in addition to impression on India given, we have now been subjected to one of many highest tariffs.
FII promoting has created strain on Indian equities. We noticed the Q1 earnings season doing little to alter investor opinion. When do you assume we will count on broad-based double-digit earnings progress as soon as once more?
The earnings season was broadly consistent with marginal cuts in earnings estimates not like previous few quarters which have seen increased cuts in earnings. Nevertheless, the standard of earnings was barely under par because the cyclical/commodity-oriented sector drove the marginal beat.
Topline progress has remained muted for some quarters now, nevertheless EBITDA margins expanded in Q1 whereas PAT progress was marginally forward of expectations, pushed by oil & gasoline and cement. Nifty incomes progress was round 8% pushed by telecom and few banks. Mid cap earnings progress was increased than massive cap whereas small cap noticed earnings disenchanted. Metals (Ferrous), OMCs, cement reported broad enchancment in earnings pattern pushed by margins.
Which sectors do you consider will lead the following leg of market progress, and what’s driving your conviction in them?
I’m optimistic on BFSI as a sector, particularly massive non-public banks. Now we have seen bettering liquidity, regulatory rest, and pro-growth financial coverage with 100bps of price cuts over the previous couple of quarters. For giant non-public banks, ROA profile has been first rate, mortgage progress ought to revive, whereas capital is enough. Giant non-public banks stand out from an intrinsic worth framework and supply a chance for these of us who comply with the intrinsic worth strategy.
Healthcare as a sector has an extended runway for progress. The share of healthcare in general GDP is lower than 5%, which is prone to pattern up as we age as a society and transition to extra organised healthcare. The per capita variety of hospital beds are at a fraction of worldwide averages and diagnostics take a look at has low penetration. Now we have a optimistic view on healthcare with extra consolation in progress for firms that are having a big share of income coming from home markets.
Cars are one other sector which is prone to profit from direct tax cuts and proposed GST cuts. We expect revival in discretionary consumption and have elevated our publicity within the car house notably passenger automobile section as home penetration ranges are low, and export alternatives are rising. On this house, I desire firms that are focussed on gaining worth market share with out compromising margins.
With a collection of measures like revenue tax and GST price cuts, do you assume consumption is changing into a no brainer theme for the following couple of years?
Home macros have improved over the previous couple of months, with financial as properly fiscal measures to enhance consumption. Stimulus began with sharp enchancment within the liquidity surroundings adopted by well timed price cuts by RBI, this was additional adopted by steep enhance in exemption limits on direct tax for particular person taxpayers and now the announcement of discount in GST slabs doubtlessly paving method for decrease charges for many high-ticket discretionary objects.
Shopper discretionary must be beneficiary of the assorted coverage measures during the last 2-3 quarters. City consumption has gone by a tough patch during the last 1 12 months resulting from excessive inflation and low per capital revenue progress. Tax cuts and declining inflation might drive some cyclical restoration on this section. We desire cars as a sector to take part in any potential revival in discretionary consumption.
Lastly, what’s the one contrarian concept you’d again for the following 12 months?
The Indian IT sector has demonstrated progress and resilience over a number of know-how cycles of the previous 2 a long time. The sector is now dealing with new potential disruption within the type of deflationary impression of AI which can scale back the general income pie as clients demand bigger share of productiveness enchancment led financial savings. Nevertheless, it’s fully potential that the income pie for information analytics and integration of AI brokers in purchasers’ IT structure might compensate for that. Most Indian IT companies have the DNA to navigate the tech cycles effectively. Any signal of progress recovering can drive a rerating.
The volatility within the US macro surroundings on account of tariffs is one other potential headwind which has lowered visibility for FY26 progress for IT, as administration takes cautious views on new investments. Nevertheless, the sector is popping out from greater than 2 years of slowdown and has some pent-up demand which is prone to drive mid to excessive single digit progress for subsequent 2 years.
IT as a sector is a contrarian concept that appears comparatively cheap to me. The premium of Nifty IT over Nifty has fallen sharply, whereas the low cost of Nifty IT over Nasdaq has expanded. Largecap IT is buying and selling at excessive free money move yield with some of the beneficiant dividend payouts.