“We believe that foreign flows into Indian equities could slow down. It is not because the world is not convinced about India’s growth, but because given the rates at which treasuries are quoting in the developed markets,” says Harini Dedhia, Portfolio Manager and Head of Research, Tamohara Investments.
In an interview with ETMarkets, Dedhia said: “The risk-to-reward ratio is not favorable in looking at equities in general as an asset class; forget Indian equities,” Edited excerpts:
We are seeing some turnaround in Indian markets – is it the Diwali dhamaka or Santa rally?
Neither really. The last 1-year performance of the Nifty50 has been less than that of a fixed deposit scheme, so to term it a rally would be incorrect.
What are your expectations from Samvat 2080?
In Samvat 2080, I expect companies to broadly hold on to their normalized margins; a return to which we are only starting to see in Q2 of FY24.
Last year supply chain disruptions depressed margins. So, a return to margin normalcy with sales growth broadly for BSE500 tracking in line with nominal GDP of India at 11-12%.
Valuations have little room to go up from here on, so logically market performance at best should toe the line with this fundamental growth expectation.
Top risks that investors should watch out for in the next 12 months?
We believe that foreign flows into Indian equities could slow down. It is not because the world is not convinced about India’s growth, but because given the rates at which treasuries are quoting in the developed markets, risk-to-reward ratio is not favorable in looking at equities in general as an asset class; forget Indian equities.
Money with a shorter time frame of investment, may not prefer Indian equities as an asset class.
Apart from this, the usual shocks of election outcomes, geopolitical risks, etc. can play out but these are neither structural nor sustained in nature. Markets are elastic in absorbing such risks.
How should one play the capex theme? Do you have some traction in this space ahead of national elections?
As an investor, I go more by actual cash flows rather than headlines. Typically, in an election year, the real government/fiscal expenditure gets front-loaded with 12 months ‘ worth of spending taking place in 9 months.
The last few months are more for campaigning/sloganeering rather than actual spending. To that extent, I feel that we may see a tempering of actual capex spend from the government over the next couple of quarters.
A real pick-up would be once the new cabinet is in place. For now, we would like to take advantage of any volatility in the prices of capital goods companies to add some from the ‘flow’ category of companies to our portfolio.
By flow category, we imply any company that manufactures products that are consumed in capex- such as explosives or grinding media in mining or cables and wires. They are not the manufacturers of machinery itself which is generally more cyclical in nature.
With interest rate at around 5% — how is FII activity likely in Samvat 2080?
We believe that foreign flows into Indian equities could slow down given that US treasury is at 5%, the risk-reward is not favorable in looking at equities in general as an asset class; forget Indian equities.
Both India and the US have delivered a 7% USD CAGR return over the last two decades. With valuations one standard deviation over the mean, and the difference between the average return of 7% USD return and 5% “risk-free” rate, many managers would be compelled to simply not take the risk of investing in equities. Especially since a recession is expected in the US.
Having said that, given the strong earnings growth visibility in India, I do believe that any stock market volatility will be bought into. There is possibly no better place for investors with a long-term time horizon than Indian equities.
What does the management commentary of India Inc. suggest for the next few quarters? Any earnings of companies that stood out?
One thing that stands out is the earnings visibility this time around. India Inc. on average is de-levered compared to its own history and has the highest confidence on earnings growth for the next decade.
The reforms that were kickstarted with the corporate tax cuts in September 2019 were later augmented by PLI, a spend on general infra such as rail DFC, a national grid, record highway construction, etc.
These along with the techstack built by the government including UPI, Aadhar, FastTag, ONDC, etc. are great enablers of growth.
Pharma earnings have stood out as a pack, especially of formulation companies. They have woken up after an 8-year earnings slumber.
Steel pipes and tubes is another niche segment where earnings have been very strong and the commentary even stronger.
Companies that benefit from the government’s Jal Jeevan mission also are a niche that seems to be delivering very well.
Real estate stocks have been in focus lately – are you tracking this trend?
We are and we have participated in this trend. However, we do so with more consumables such as cables and wires, rather than real estate companies themselves.
We have seen a pickup in real estate sales volume after almost 7-8 years. Inventories are getting exhausted in select micro markets and we are seeing a desire to upgrade the amount of square footage used by families as well.
Given our nature of being cash flow-conscious investors, we have chosen to play this trend via the consumables in homebuilding.
Any sectors that investors should avoid or go underweight after a recent rally?
Autos would be a segment we would avoid any fresh allocation to, especially passenger vehicle linked. As a principle, we don’t invest in companies that are trading at peak valuations and peak margins.
Furthermore, the dealer-level inventory for passenger vehicles has seen a significant spike. This is a massive shift from the long waiting periods that were being quoted this time last year.
We would want to see some rationalization in stock prices as well as dealer inventory levels to make any fresh allocations here.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)