With the Indian market on a record-making sprint, concerns have been mounting over valuations but Shiv Chanani, senior fund manager–equity, Baroda BNP Paribas Mutual Fund, is not worried.
Absolute valuations are in line with the long-term averages. Combined with the fact that aggregate earnings growth is likely to be in the mid-teens, he doesn’t see froth in the market, Chanani, who has more than 24 years of experience in fund management, tells Moneycontrol. He, however, does see four risks that can derail the rally. Find out the details in the edited excerpts of the interview:
Do you think largecap and midcap valuations are at a similar level now?
First of all, the absolute valuations of the market are in a comfortable zone and in line with the long-term average. Combined with the fact that aggregate earnings growth is likely to be in the mid-teens, we do not see any froth in the market.
Coming to comparative valuations for largecaps and midcaps, while they look similar on an optical basis, it may be misleading on account of a couple of factors. Firstly, midcap companies tend to offer high earnings growth compared to largecaps. Secondly, midcap companies are more of a bottom-up play and almost every company is varied in nature. We continue to remain excited about the investment opportunities in the midcap space.
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Do you expect strong earnings growth in smallcaps?
While it is always tricky to talk about aggregates in the smallcap space, nevertheless we expect small caps to report strong earnings because (a) we are witnessing a renaissance of sorts in domestic manufacturing which has a significant multiplier impact on smaller companies and the salience of manufacturing sector is higher in smallcaps; (b) the end of rate hike cycle appears to be in sight and (c) balance sheets of most of the companies are in a good shape with low leverage.
Having said that, we believe that smallcap investing is all about a bottom-up approach and finding potential future champions.
As the banking sector outlook remains strong, do you see largecap banks reporting 20 percent earnings growth?
Earnings growth for the largecap banks would be a function of three things – 1) credit growth; 2) net interest margins; and 3) credit cost. Credit growth is expected to be in early double digits in line with nominal GDP growth and credit costs are expected to remain benign in the near term.
However, one would watch out for the compression of margins, given the lag effect of liabilities repricing. Overall, on a long-term basis, it would be reasonable to expect larger banks to report mid-teens earnings growth on a compounded basis.
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Which are the pockets to play on?
At the current juncture, we prefer domestic play — capex, consumer and credit. As mentioned earlier, India is witnessing a better capex revival because of multiple factors coming together such as a) continued infra push from the government, b) Production-linked incentive (PLI) schemes encouraging domestic demand, c) focus on renewable energy and d) India emerging as an important candidate for China +1 strategy followed by global companies.
On the consumer side, we are witnessing tectonic shifts in consumption patter as India readies to move from per capita income of $2,000 to $5,000 over this decade. We believe that three key drivers for consumption could play out: a) higher penetration in existing categories, b) premiumisation as income levels go up and c) new categories such as food. Shift from unorganised to organised would be an added driver for the larger companies over and above the macro tailwinds.
Finally, an uptick in both capex and consumer bodes well for a healthy growth in credit offtake as well. Here too, we expect the big to get bigger as the larger counterparts would have higher wherewithal to invest in technology which is increasingly becoming a critical part of the banking business.
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Is the metal space looking overpriced?
The metals sector has a mixed picture at this point in time. While there are tailwinds on the cost side due to a fall in energy prices, the demand scenario remains uncertain. Historically, China has been one of the key drivers for metal prices. However, the economic recovery in China post covid has been weaker and slower than expected, which is capping any meaningful upside on metal prices.
What are the possible major risks that can derail the market rally?
Most of the risks currently emanate from the global perspective. Key risks that we believe the market should look out for are – 1) continuing Russia-Ukraine conflict and its impact on energy & food markets; 2) lag effects of transmission of the tighter monetary regime from key central banks (FOMC, ECB etc.). With the FOMC indicating two more rate hikes by the year-end, the RBI’s rate easing trajectory could be delayed, 3) China appears to be slowing faster, prompting the PBOC (Public Bank of China) to undertake rate cuts to support the economy and 4) the possibility of El Nino, primary articles inflation and, therefore, the trajectory of RBI policy action.
Will SIP inflows into the market remain strong?
Over the years retail investors have come of age and shown remarkable maturity. They have acknowledged that the equity market is not going to be linear but over a period been the asset class to beat inflation. Despite the pandemic and other macro and global factors, retail investors have remained resilient and confident about the markets, which is visible in net SIP additions that have remained positive every month for almost four years now.
Given the strong equity markets performance over the last year and a healthy outlook for India, we expect retail investors to continue with their faith and funds in the markets and expect strong SIP inflows to continue. Another interesting observation is ticket size of SIP is a lot more granular and the holding period seems to be increasing. All this augurs well for equity cult.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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