What do you say to your customers as rapid moves hit the market?
You have to understand that although a lot has happened in the last two or even three months, my overall impression is that India on a stand-alone basis will still be much better positioned in terms of growth versus valuations and inflation risk. perspective in relation to the rest of the world.
We are already seeing inflation around 7.9% in the United States and we see it at its highest level in several decades in Europe as well as in China. We see how growth is slowing down in a sort of lockdown scenario. Even assuming the full impact, in the worst case scenario, we are still looking at a GDP growth rate of over 7%. We still see realistic double-digit earnings growth in Nifty from a FY23 perspective.
Where we are today, the multiples of risk versus reward versus earnings profile and sustainable earnings profile on a PEG basis are still very attractive at less than twice the price versus earnings growth . This is basically why I think we as a house would continue to be very favorably inclined and bullish on equities. If you have a two to three year investment horizon, this correction that has occurred is a golden opportunity to go long with a two to three year outlook. There’s a truckload of cash to be won.
What sectors would you look at? When I look at the winners and losers last year the so called famous tech names would have given you losses but the good old heavy manufacturing names like L&T and asset heavy companies would have given returns decent. Should we stick to the old proven names?
No, I think CY2022 is going to play out very differently from CY2021 where we saw cyclicals rally as they did and structural growth sectors like FMCG and Pharmaceuticals underperformed. perform. In FY2023 or CY2022, for me the number one theme I would like to play will be finance. If project finance is going to come back, if private sector investment is going to come back, we’ll see the lending growth trajectory continue to improve.
The credit growth trajectory has already come a long way, moving from a range of 5-5.5-6% to a range closer to the high single digits now. It’s only a matter of time before he hits the low double-digit trajectory. We’ve seen the way asset quality has improved, we’ve seen gross NPAs decline and the way provision coverage ratios have increased over the last few quarters, private sector banks are going to be a space that i will be very positive inclined towards.
The second sector I’m going to get into is IT services. The behavior of the currency plays in its favour. But above all, the growth profile remains intact. And with the correction we’ve seen so far this calendar year, this sector will be favorably placed relative to where it has been historically.
The third sector is consumer discretionary. We expect consumer discretionary to remain very strong over the next two years. We are therefore underweight commodities, overweight consumer discretionary, IT services and financials. That’s basically how I would play stocks in 2022-23.
We have never seen such commodity hyperinflation before. Do you think the markets have digested it well? Do you think the major movement in oil prices and other commodities like wheat, corn will be a risk to expect?
Yes and no both. There is a bit of concern in my mind from China’s perspective. Even though the number of cases in absolute terms in China is not very large at 5,000-5,500 per day, but the fact is that two wider regions are locked down and that basically means that from a freight rate perspective containers, the situation can gradually worsen quite significantly.
This is going to be a big boost as far as global inflationary pressures are concerned and to some extent India is not going to be immune to this. This is where a lot of moderation happened in my earnings expectations. Two months ago, we expected earnings growth between 17% and 19% for Nifty in 2022-23.
Realistically, we’re looking at an 11-13% band today and there’s at least a 5% reduction. Much of this impact is going to be front-loaded, which will happen in Q1 or thereabouts before leveling off. But when you look at it from the perspective of growth versus inflation, India is still doing quite well compared to some of the other economies in the world, especially the developed part of the economy like India. Europe or the United States.
In the United States, for example, inflation is closer to 8% levels and seems to be heading towards 10% for an economy that is expected to grow at a quarter of the rate. But India is still expected to grow at a higher rate in terms of GDP growth rate compared to the prevailing rate of inflation in that country. So even from a policy rate perspective, it’s 6%. We’re around negative 200 basis points versus the US, which is closer to negative 750 basis points.
We are therefore much better placed in the global context and the correction of the market from the top, despite the rebound of the last two days, has been largely taken into account. Unless something happens very dramatically at this point, the market is not going to react too negatively.
How would you see things? Would you consider a correction in some of the names where the FIIs are heavy and the correction was high because they are compulsive sellers? Is this the space to watch?
There are two things I’m going to look at. You have to realize that over the past 10 years we have paid 18 to 19 times the multiple on average for 6% Nifty earnings growth. Today, we are paying the same multiple for 11 to 12 times earnings growth. So obviously, from a value perspective, we’re in a much better position today.
But what is also happening is that the dynamics of the market are undergoing a paradigm shift. The focus is moving away from what used to be multiple-sensitivity to growth-sensitivity. Wherever there is a question mark over growth, however slight, the punishment will be disproportionate.
We’ve seen that in IT services companies, so far this calendar year, when looking at the correction to the numbers from a third quarter perspective, the punishment has been disproportionate. If I’m going to build a new portfolio today from a FY22-23 perspective, then the focus will be on two fronts; I’m going to choose stocks where I think the risk versus reward is balanced or more in favor of reward, which basically means either the growth outlook has improved or a significant correction has occurred in those shares.
The second thing I’m going to be very aware of is the growth that’s coming up against expectations. Wherever there is a question mark on growth, these will be the sectors where it will be very badly treated. Those are the two things I’m going to be very careful and mindful of from a portfolio construction perspective as it relates to the Indian markets in FY22-23.
So basically you think value will outperform and only companies where growth is available at a reasonable valuation will do well, not growth at all costs?
It’s a nice summary of what I was probably trying to get across. We’ve seen a massive bull run over the last year, year and a half and we’ve seen pretty much every sphere of the market perform – value, growth, quality, non-quality. There was a very significant run up from Nifty to around 8,000 when the pandemic started to move closer to 18,000 and above. This easy money-making opportunity is now very clearly behind us and gradually one has to be very careful about quality and risk versus reward. The money-making opportunities are going to be plentiful, but high due diligence is required and it won’t be as easy as it has been in the last 12-15 months.