“Nifty valuations tend to hide some things. Some overvalued companies are there in the Nifty and at the same time there are some undervalued companies as well. But on an overall basis, we are in the reasonable zone right now. The valuations look very very reasonable and it may be the time to start nibbling and adding over a period of time.”
“The banks have underperformed the markets in the past two years but we could see some reversal in the banks and we like the top private sector bank names. The larger term trend of market share shifting from the PSUs to the private sector banks remains intact and we like the top private sector banks,” says
Raj Mehta, Fund Manager, PPFAS MF
There has been adjustment in the market sentiment in the last two weeks. Now the Street knows that there is reason to believe that the rate hikes there in the US will be sharper than what we had earlier thought. Has that pricing already happened or is it yet to happen?
The macro environment is a little unstable right now with the war situation as well as with the inflation numbers, which we are seeing in the US and globally. We need to be prepared for volatility in both global as well as Indian markets. We need to admit that the Fed was behind the curve in terms of raising interest rates and we might see some larger rate hikes going ahead as well. So a 75 bps rate hike is something which has been already priced in by the market and we will see how the inflation numbers pan out over a period of time.
So 2020 and 2021 were very good years in terms of returns for the investors but now one needs to be wary that after such a good run, we may see some bit of a time or price correction and one needs to temper down the return expectations. The era of free money seems to be over and we have seen corrections in all the names where the narratives were stronger than the numbers.
A lot of new investors who entered the market in the last 24 months are learning some of the very old lessons on the market. Back home in India, the way CPI data came in and the commentary from the Fed as well as the RBI Governor, do you think there is reason that liquidity may remain tight in the Indian system as well on a prolonged basis?
Definitely so. In India, along with the inflation numbers that we have been seeing and the 90 bps rate hike which we have seen in the past couple of months, we could see a couple of more rate hikes and that is also priced in by the markets as the bond yields show. But on the liquidity side, liquidity will tighten both globally as well as in India and we could see some pressure in terms of flows especially from the FIIs in our markets.
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What about valuations? The Nifty data shows valuations have gone below the five year average and may be still higher versus the 10 or 15 years average. But at least some correction in the valuations has happened in the broader market. Compared with the largecap universe, where do you see much better risk reward in terms of the correction?
The Nifty valuations tend to hide some things. Some overvalued companies are there in the Nifty and at the same time there are some undervalued companies as well. But on an overall basis, I feel that we are in the reasonable zone right now. We might not be in the attractive zone but definitely the valuations look very very reasonable compared to what we had seen in the past couple of years and it may be the time to start nibbling and adding over a period of time.
You have a very large position in in one of the funds. Do you see merit in some of the defensive stocks like ITC in the consumer universe?
Overall in consumption stocks, the valuations are very expensive. Apart from ITC, if you look at any other company, the valuations are very expensive. At the same time, the volume growth has slowed down and the margins have come under pressure due to the raw material price increases. We may see a larger time correction in these consumption names and that is why the only stock that we own in this space is ITC. At the same time, we see some merit in other sectors also that they are presented.
What about banks? The numbers in a good chunk of corporate banks have improved in the last couple of quarters. seems to have added market share in the last one year. But the Street is ignoring all of that. What are the prospects of the top three-four private sector banks over the next two to three years?
The banks definitely look very attractive to us. The weightages of banks in our portfolio has gone up in the past couple of months. The primary reason being that most of the banks have very clean balance sheets now. They had raised equities during the Covid lockdowns and at the same time, the provisioning for the NPAs might be higher than what they should provide for. Over a period of time, we may see these provisions coming back into the profits. Also the credit growth going forward should be higher, given the GDP growth that we may see in our country.
The banks have underperformed the markets in the past two years but we could see some reversal in the banks and we like the top private sector bank names. The larger term trend of market share shifting from the PSUs to the private sector banks remains intact and we like the top private sector banks.
What about the auto space? We are getting a sense that this sector is coming out of a five-six year kind of a downcycle. Do you feel the same?
Definitely so. We were a little bit early in terms of entering these names and so we entered at the wrong time of the cycle. But definitely we feel that right now, autos are at the cusp of reversal. We have seen demand picking up. The raw material prices, especially the metals prices have started coming down and at the same time, the semiconductor issues are getting solved. Most of the players have a waiting period of two to three months plus. Demand is picking up and we could see some good growth going ahead in the second half of this year.
How the flows to your funds the big HNIs you work with retail across the country and I know that PPFAS bulk of the advertising is word of mouth and people are loyal, how are your investor community you guys interact with reacting to this correction are they giving you more money, are they willing to allocate more some feedback on that front?
In terms of flows, we have been very lucky. The flows have been very steady. In our Flexicap fund, which is the flagship fund, we have been receiving about Rs 1,000 crore on an average per month and we have been able to deploy it and some attractive names across the portfolio. When we talk to HNI distributors etc. they want to take advantage of this correction and at the same time, they do not want to jump in with the full allocation that they want. So over a period of time, they want to stagger their investments and probably a three to six month time frame is good to stagger investments given where the markets are.
What has the average forward earnings multiples come down to in this corrective phase versus the kind of earnings growth in your funds?
We do not track the aggregate price to earnings multiple of the portfolio but we do track it on an individual basis because sector wise, the price earnings multiples that we want to give to each sector and each company within each sector will be different but all in all, we find that some sectors and some stocks in our portfolio have become even more attractive in this fall and we have been adding to those names.
At the same time, there are some sectors and names which look expensive and we have not been adding to it over a period of time. The weightage comes down automatically over a period of time with the fund flows coming in.
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