Sensex and Nifty have failed to beat bank FDs in the last one year. Do you think that most of the time correction is behind us and that the growth trajectory should be back soon?
Historically long-term returns of equity as an asset class are much superior to banks FDs, short term volatility is part and parcel of equity as an asset class.We do not predict market levels. What we focus on is valuations which are now in fair value zone for large caps. Small and mid-cap remains expensive. We have internal model for asset allocation which is used for equity allocation in some of our asset allocation strategies and that model is suggesting around 65-70% percent asset allocation to equity which has moved up by ~ 5% over last few months.
Market cap of companies is essentially the discounted cash flow of future earnings. It does not change materially based on short-term events. What changes surely is the narrative, so stocks which were riding on narratives are relatively more at risk than those which are backed by solid underlying growth.
Also, we need to consider the macro shock in terms of sharp increase in US tariffs on goods and its impact on global growth as well as impact on India given, we have been subjected to one of the highest tariffs.
FII selling has created pressure on Indian equities. We saw the Q1 earnings season doing little to change investor opinion. When do you think we can expect broad-based double-digit earnings growth once again?
The earnings season was broadly in line with marginal cuts in earnings estimates unlike last few quarters which have seen higher cuts in earnings. However, the quality of earnings was slightly below par as the cyclical/commodity-oriented sector drove the marginal beat.
Topline growth has remained muted for some quarters now, however EBITDA margins expanded in Q1 while PAT growth was marginally ahead of expectations, driven by oil & gas and cement. Nifty earning growth was around 8% driven by telecom and few banks. Mid cap earnings growth was higher than large cap while small cap saw earnings disappointed. Metals (Ferrous), OMCs, cement reported broad improvement in earnings trend driven by margins.
Which sectors do you believe will lead the next leg of market growth, and what’s driving your conviction in them?
I am positive on BFSI as a sector, especially large private banks. We have seen improving liquidity, regulatory relaxation, and pro-growth monetary policy with 100bps of rate cuts over the last few quarters. For large private banks, ROA profile has been decent, loan growth should revive, while capital is adequate. Large private banks stand out from an intrinsic value framework and provide an opportunity for those of us who follow the intrinsic value approach.
Healthcare as a sector has a long runway for growth. The share of healthcare in overall GDP is less than 5%, which is likely to trend up as we age as a society and transition to more organised healthcare. The per capita number of hospital beds are at a fraction of global averages and diagnostics test has low penetration. We have a positive view on healthcare with more comfort in growth for companies which are having a significant share of profits coming from domestic markets.
Automobiles are another sector which is likely to benefit from direct tax cuts and proposed GST cuts. We are expecting revival in discretionary consumption and have increased our exposure in the automobile space particularly passenger vehicle segment as domestic penetration levels are low, and export opportunities are increasing. In this space, I prefer companies which are focussed on gaining value market share without compromising margins.
With a series of measures like income tax and GST rate cuts, do you think consumption is becoming a no-brainer theme for the next couple of years?
Domestic macros have improved over the last few months, with monetary as well fiscal measures to improve consumption. Stimulus started with sharp improvement in the liquidity environment followed by timely rate cuts by RBI, this was further followed by steep increase in exemption limits on direct tax for individual taxpayers and now the announcement of reduction in GST slabs potentially paving way for lower rates for most high-ticket discretionary items.
Consumer discretionary should be beneficiary of the various policy measures over the last 2-3 quarters. Urban consumption has gone through a rough patch over the last 1 year due to high inflation and low per capital income growth. Tax cuts and declining inflation may drive some cyclical recovery in this segment. We prefer automobiles as a sector to participate in any potential revival in discretionary consumption.
Lastly, what’s the one contrarian idea you’d back for the next 12 months?
The Indian IT sector has demonstrated growth and resilience over multiple technology cycles of the past 2 decades. The sector is now facing new potential disruption in the form of deflationary impact of AI which may reduce the overall revenue pie as customers demand larger share of productivity improvement led savings. However, it’s entirely possible that the revenue pie for data analytics and integration of AI agents in clients’ IT architecture may compensate for that. Most Indian IT firms have the DNA to navigate the tech cycles efficiently. Any sign of growth recovering can drive a rerating.
The volatility in the US macro environment on account of tariffs is another potential headwind which has reduced visibility for FY26 growth for IT, as management takes cautious views on new investments. However, the sector is coming out from more than 2 years of slowdown and has some pent-up demand which is likely to drive mid to high single digit growth for next 2 years.
IT as a sector is a contrarian idea that looks relatively reasonable to me. The premium of Nifty IT over Nifty has fallen sharply, while the discount of Nifty IT over Nasdaq has expanded. Largecap IT is trading at high free cash flow yield with one of the most generous dividend payouts.
