Is outperformance returning to broader market?

Kunj Bansal, National Institute of Securities Market (NISM), says “rural demand will pick up, possibly after the crop comes in or because of the election and other things, the government sending money into the hands of the people comes in or whatever other factors. So, that is where we will see the demand coming in. These sectors, given the way their valuations have become attractive because of the non-performance of the overall sector as a whole, becomes a good investment case for a medium- to long-term investor from the point of view of optimum combination of fundamentals and valuation. A short-term trader will continue to look at the trading pattern, the stop losses and things like that.”

What did you make of the market move yesterday? Outperformance was coming in from the broader markets again.

Kunj Bansal: Obviously, after the correction that we saw in the short term over the last few days, if we calculate in number terms in largecap, I do not think the correction was significant. In percentage terms, it was hardly 3-4% from the peak of Nifty 22,500 odd. But yes, smallcaps and midcaps are where we had seen significant correction in index terms and more so in individual stock terms which obviously was in line with the kind of disproportionate return also or the outperformance that is small and midcaps had given over the last quite a long number of months.


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I guess it was more of a short-term kind of thing. The market has to keep giving the sense of the fact that equity is not a one-way straight asset class, it is not a fixed income kind of asset class which will keep giving you returns at all the periods of time; there are risks involved and the market has to keep giving some corrections also for the fresh set of money which is waiting on the sidelines to come in.

Of course, the valuation becomes an issue if the market keeps rising one way, then we have the valuation. So, for us in India, the question of valuation anyway remains a challenge. We all keep saying that the Indian markets are always expensive. So, the largest growing economy in the world obviously is expected to be expensive. One cannot imagine the highest growth rate economy being available at a cheaper valuation.

But within that, these kinds of corrections are something that is necessary to keep giving those intermittent corrections of valuation. The problem that happens with retail investors is that they tend to shy away even with these corrections and build in a mindset that maybe there will be more corrections. However, that is always difficult to predict. Given the way the macro economy of the country has been remaining strengthened and with inflation coming under control, with fuel price having come down, unless all things remain in place, we could see CPI coming down further. So, one has to keep that confidence and take a call.

Have you been a buyer in the recent correction in the small and midcap space? I know you cannot talk about stocks, but after the recent ease-off, any pockets which are looking interesting and coming back to the value zone?

Kunj Bansal: Obviously these corrections are the time points that give us the relative valuation correction and as a result, relative safety to invest in in terms of the combination of fundamentals and valuation and then one has to take a call. If one is not comfortable taking a full call, one has to take a part investment call.

Moving on, if I look at the numbers that are there for the previous few quarters and based on the order books that the managements have talked and the valuation correction taken together and juxtapose it with the fact of the overall Indian economy doing well and which area is doing well, capital goods as a space is the one which looks like will continue to do well, given the way the order books are there, given the way the execution has been happening and given the way selectively raw material price correction has been supportive in terms of margin improvement.

So, that is an area that seems to be giving investment opportunities. Extending that, in auto and auto ancillary, demand finally seems to be picking up. In fact, demand has emerged in the two-wheelers also. Earlier it was getting restricted to the higher end of the vehicles, which is passenger vehicles, but now we are seeing good demand in two-wheelers also. Of course, stocks have moved up sharply in that period, but wherever there is a correction. These are some pockets which one can look at.

You did highlight the auto ancillary space but what about the pure play auto majors because there the bull party continues unabated, be it in M&M, be it Tata Motors, or Maruti which as late as yesterday managed to hit that 12K mark?

Kunj Bansal: Again, we have to start by looking at the holistic picture and then going down. As as we were discussing that on a macro basis the Indian economy seems to be doing well and within that more specifically on the auto and auto ancillary space, we have seen the numbers continuing to remain positive. Of course, there is a mixed trend.

Tractors for example have not been showing good growth. CVs have shown some slowdown after remaining good. Passenger vehicles are something that continues to do well and two-wheelers which earlier were not doing well, have been doing well for the last few months. Now in anticipation of this good performance as well as in line with the market which had anyway been going up till hardly about 15 days ago.

All sectors which were either non-participative earlier or which had been giving good numbers or expected good numbers moved up and within that auto also moved up. So, yes, while auto ancillaries is something that will be positive for the multiple reasons of export and domestic mix, of ICE and EV mix, the auto OEMs also will obviously be the beneficiary of the overall demand pickup that has happened assuming that it sustains.

What is your sense of the entire urban recovery? Zomato technically is one such play. Should one stick to the urban consumption theme, the premiumisation theme or should one look at the rural plays which have a higher chance of a comeback & give bigger alpha in that sense?

Kunj Bansal: A sane investment approach and advice will be that you look at the optimum combination of fundamentals and valuation and within that, if we look at the consumer space which has been continuing to face slowdown for quite a number of quarters. Consumer extends right from fast-moving consumer goods to consumer durables to electrical, electronic equipment manufacturers, household appliances and things like that.

The demand slowdown obviously has reflected in their numbers remaining subdued on the top line and bottom line growth, in fact in some places they have benefited because of the raw material price correction. Now, in any growing economy, ultimately the demand has to come back and this urban rural gap demand has to kind of merge.

So, rural demand will pick up, possibly after the crop comes in or because of the election and other things, the government sending money into the hands of the people comes in or whatever other factors. So, that is where we will see the demand coming in. These sectors, given the way their valuations have become attractive because of the non-performance of the overall sector as a whole, obviously becomes a good investment case for a medium- to long-term investor from the point of view of optimum combination of fundamentals and valuation. That is what the medium and long-term investor has to look at. A short-term trader will continue to look at the trading pattern, the stop losses and things like that.

William Murphy

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