Largecaps offer better value: Krishna Sanghavi

Krishna Sanghavi, CIO-Equities, Mahindra Manulife MF, says “we need volume growth and that is the idea, as manufacturing picks up in India going ahead, as those PLIs start playing out in terms of actual output being visible, we will have a volume-led growth and that will percolate through a lot of things including maybe property cycle, including consumption, discretionary, etc.”

PhilipCapital India’s Subodh Gupta’s chart reading tells that Nifty has a potential to double in the next four to five years. I will talk to you from the other stance. Do you think Nifty earnings can double in the next four years because stocks actually follow the earnings. Do you think you are getting that kind of earnings comfort when you look at Nifty at around Rs 1000, 1100 EPS right now? Can it double in the next four-five years?

Krishna Sanghavi: We are in for a growth phase as far as the economy is concerned. Look at any parameter. India is growing and if we are going to catch up with number four and number three players in the economy list in dollar terms, I am sure our rupee growth will be significantly better and yes, Nifty and all our earnings (in rupee. So, our broad sense is yes, earning growth in the Indian context will be higher than the nominal GDP growth rate for India as a country.

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As far as Nifty specific is concerned, clearly, while it is always easy to say yes or no, appreciate that what Nifty we are seeing today may or may not remain the same in terms of the index constituents. The relative earning profiles change with time because new stocks are added or some old stocks are deleted. But broadly yes, Nominal GDP growth rate plus 2-3% is what Indian corporates have delivered, especially the large ones, and one does expect that to really play out in the Indian context also, yes.

Let us also talk a bit near term. Even the RBI’s monthly bulletin which came in last evening seems to be presenting a pretty decent case for where the economy is right now, the high frequency indicators, not to mention RBI’s recent commentary about closer to 8% growth, all of that, but market cycle versus economic cycle. Market cycle may have already run its course, that is what most are talking. Are you of the opinion as well? How would you compare both?

Krishna Sanghavi: Clearly, the market cycle and economic cycle have their own growth path. The moment you start looking at the shorter end, the moment you become medium term, long term we know eventually the two has to converge, coexist and that is where the long-term return wealth creation potentials are offered.

If we look at, absolute near term, we do believe that yes, a lot of this growth potential could have been captured in some segment of the market through the market cycle appreciation and one of the best part about equity markets perhaps can be that there will be some pockets where the incremental earning growth or the incremental market cycle catch up can happen and that is the believe that yes, the economic cycle and market cycle do have their own slightly different growth path. Eventually they converge, yes, in between sector rotation, possibly stock selection definitely creates opportunity for those while playing out that cycles.

Within the market,, there is an opinion that from here on, the largecaps offer better value, smallcaps do not. Smallcaps saw a fair bit of corrective phase and a shake out as well. How did you approach and what is your observation on this part?

Krishna Sanghavi: We have been observing Indian markets for maybe a couple of decades and we always had this kind of debates playing out over the last two decades about relative choice between large, mid and small. If you really go, if you really think through, there is some sort of a challenge on largecap, midcap, smallcap valuation. Over time we realised that this number is always the same. They have reasonably realigned to long-term return profile being similar.

What changes in the short term is the excess of either investor optimism or excess of earning growth in some category which can create those distortions. For now, let us look at today where we stand, approximately a year back, Indian markets had made some sort of relevant bottoms in let us say valuation terms or in price terms for all the indices, but last 12 months have been pretty good for smallcap, midcap primarily and maybe largecap later on.

So, coming from a strong base where the smallcap itself would have given a 60% kind of return, midcap 50% plus kind of return, yes, it is time for some consolidation because we know that markets are not known to give 50% CAGR kind of numbers.

So, to that extent, I think there will be more change. Largecaps have become far more attractive than what maybe they were sometime back. And yes, the market relative outperformance cycle does play out over market caps. For now, we believe largecaps offer as overall space far more value, far more investable opportunities. Having said that, clearly the way the Indian economy is, the sheer number of companies available for investing, especially in smallcaps, we do believe there are enough opportunities as such in smallcaps, but as an aggregate basket, largecaps offer better value.

How have you been deploying your additional capital? Which themes are looking good, are more durable in nature and anything which India would be building and consuming, services or products or manufacturing, we have seen some of the other global economies already done that say US for that matter or parts of west or China our nearest competitor for everything, so where should one get into in those lines?

Krishna Sanghavi: The relevant theme for this particular decade is likely to be India manufacturing where India as a country will either do exports of new goods which we have not been doing till now or import substitution of something else which India is consuming as importer. So, the moment you get into manufacturing, one immediate outcome is that India as a country will start using all the factors of production whether it is land, labour, capital, the traditional ones or alternately you look at it power and fuel, maybe metal, maybe something like petrol, diesel and I can think of N number of variables which we will use, our own ports will be used maybe far more than what we have been using till now.

So, the macro picture can be core economy related sectors can have a disproportionately higher growth vis-a-vis the previous decade as far as India story is concerned. Looking forward, if you really plot today’s excess capacity available in some of these core sectors like power, like refining, like maybe steel, etc, and you really plot next three-five years growth, you realise that somewhere India needs to start building capacities far ahead of time today because somewhere in let us say CY27 or maybe CY28 or perhaps CY26, we might be running at full utilisation of existing capacities and that is where incremental capacity needs to come up.

So, one core theme can be basic core economy sectors primarily and the entire ecosystem eventually, which converges into say consumption because finally the end objective is employment for many Indians which will promote consumerism. But for now, the core economy theme looks far more dominant to play out.

What are your thoughts on earnings because that is becoming a point of questioning. We have seen good earnings growth even in the quarter gone by especially on margins front but the view now emerging is that top line growth because of improvement in base also may become a bit of challenging. Is it a bit of a worry and hence a challenge in coming quarters?

Krishna Sanghavi: I think, yes, FY24 has been far more favourable on the margin front. Again, as a macro picture for India as a country, we have seen a lot of benefits of digital efficiency coming into everything, including government finances, including the corporate world where infrastructure improvement, etc, is playing out through margin improvement.

Going ahead, we need the volume growth to pick up. Let us look at current year data itself. We are running nominal GDP of around 9%, GST collection of 11.7% and maybe real GDP should be somewhere closer to maybe 7.5% or perhaps higher depending on what final Q4 numbers are. So, I think we need volume growth and that is the idea, as manufacturing picks up in India going ahead, as those PLIs do start playing out in terms of actual output being visible, we will have that volume-led growth and that will percolate through lot of things including maybe property cycle, including consumption, discretionary, etc.

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