ETMarkets Smart Talk: Growth at a reasonable price is expected to outperform over a 3–5-year horizon: Sahil Shah

In an interview with ETMarkets, Shah who has over 15 years of rich experience as a Fund Manager said: “Some of the highly valued frontline names have corrected by 20-30% from their recent peak. Hence, we believe that growth at a reasonable price will continue to perform do well over the longer term,” Edited excerpts:

From Wall Street to Mumbai, equity markets turned volatile post the SVB fallout. Do you see more skeletons coming out of the closet that could put further pressure on markets?
The US interest rates moving from almost 0% to 5% in a matter of 12 months is something we have not seen in many decades. The US central bank has become more proactive in terms of supporting the banks compared to what we saw during the GFC crisis in 2008.

Unlike 2008, the current scenario is more of a duration crisis or MTM crisis and not a credit crisis. In the recently concluded FOMC meeting, it is clear that the continuation of rate hikes to tame inflation is a priority.

The US Fed believes that US bank contagion can be controlled by various other measures. So far, markets have not reacted as negatively as they would in an event like this.

In the US, as well as the Indian markets, they have come off by 3-4% since the event. We need to keep a close watch on global financial institutions and how proactively central banks react, as interest rate hikes have been unprecedented.

Once the dust settles down – which stocks/sectors are likely to see a bounce back or see a reversal?
We are overweight on capital goods, automobiles, and manufacturing export themes. Additionally, some of the consumer discretionary names have been corrected.

Financials is another sector where valuations are still at reasonable levels, with NPAs having come-off significantly, and credit cost recognition having already happened to a larger extent.

Structural themes like these, where we have seen stock correction or time correction, should see a bounce back once sentiments revive.Even though the stock market is volatile – there is a breather in commodity space. What is the kind of impact you see on India Inc. earnings and respective sectors?
Commodity cost benefits have partly been seen in Q3 and are likely to continue in the coming quarters. For India Inc. ex-Financials, EBITDA margins have expanded by 150bps QoQ in Q3FY23 as commodity prices peaked in April-May 2022.

Within India Inc, automobile sector has seen highest gross margin and EBITDA margin expansion on a QoQ basis due to metal price correction.

Automobiles and Cement should continue to see margin benefits in the coming quarters. Due to China’s re-opening metal prices have risen in the last couple of months but are well below the peak seen in 2022.

We have seen some selloffs from FIIs, but how do you see flows panning out in FY24?
FIIs have been net sellers since mid-2021. We believe that FII selling in India had more to do with India’s significant outperformance compared to other emerging markets (EMs), which led to almost 80-100% premium valuation to EMs.

India’s valuation premium has now come down to the long-term average. With reasonable valuation and the economy on a relatively much stronger footing, Indian markets should attract flows from foreign investors in times to come.

As recession fears increase there is some action seen in Gold. Do you see Gold outperforming equity markets in FY24?
Gold should be a part of an investor’s asset allocation as a hedge against recession. Historically, during recessions, gold has performed well.

In the current circumstances, we believe that gold will do well in the short to medium term. However, from a long-term perspective, equities remain the preferred asset class.

For a long-term investor – should he/she be worried? Or should they rejig their portfolio?
For investors with a 3-5 year horizon, valuations are comforting at 18x for Nifty50. Small-Midcaps are not in the euphoric zone where it they typically trades at a 20-30% premium to large-caps.

Small and Midcap valuations are more or less in-line with Nifty50 valuations, which is in a comfortable zone.

When markets are in a consolidation phase led by such events, it provides an opportunity for long-term investors to invest in some of the structural opportunities where valuations have corrected, but the long-term thesis remains intact.

Which will fare better – growth or momentum stocks in FY24?
Growth at a reasonable price is expected to outperform over a 3-5 year horizon. Valuation risks were overlooked in the last couple of years, which have now come to the fore, particularly for companies that failed to meet high growth expectations.

Some of the highly valued frontline names have corrected by 20-30% from their recent peak. Hence, we believe that growth at a reasonable price will continue to perform do well over the longer term.

Any sector that could be a dark horse in FY24?
The Rural sector is currently experiencing cyclical lows in terms of consumption. The Post-COVID recovery followed a perfect ‘K’ shape, where rural consumption has been worse off compared to urban consumption.

This trend has played out across various segments, whether it is apparel retailing, cars, two-wheelers, etc. Apart from farming, construction activity is a big driver of employment.

With housing inventory coming near to a 10-year low, new launches are happening, and State and Central government capex continues at a good pace.

Private sector capex is also showing signs of a pickup, which should improve construction activity and employment, thereby increasing savings and income levels for consumers at the bottom of the pyramid.

Some FMCG companies have already highlighted that green shoots are visible in the rural economy. However, El Nino or below-average rainfall remains a medium-term risk to this thesis.

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