Is it time to now get realistic about risk reward ratio? In the month of February and March there was opportunity because markets had sold off but now markets have come back Bank Nifty up 9% from the low, Nifty is up 5% from the recent low. Do you think the bargains in the market are missing?
Yes, I do. I think if you take a one year view, we think that there is still upside, markets will largely track earnings growth where for the Nifty at least we are at 15% and this was the number I checked before the fourth quarter earnings started to come through and we may see some revisions there. But yes, I do not think we are in a sustained run there. It will be a volatile time for the broader markets. If you take a one year view, there is still upside. It is not a massive upside, largely, as I said, tracking earnings growth but be prepared for volatility because interest rates are high. And while further hikes are unlikely, we do not think they are coming down in a hurry either.
Things will be volatile. I mean, are not all the concerns getting addressed one by one; inflation, rupee, macros, Adani fiasco. If concerns are getting addressed why do you think we should brace ourselves for volatility and not a clear move?
I think the fact that those concerns have eroded, have played out in prices. But if you look at pure fundamentals and you look at earnings growth versus valuations, we are at fair point, we are neither overvalued nor undervalued.
Valuations in the last 6 to 9 months have corrected significantly. So, the worry that was there in the middle of last year that India’s overvalue has gone away, but neither is it, like compellingly cheap on the other side.
The volatility is on the trajectory of earnings. We think that there will be a broad consumption slowdown in FY24 based on a high base effect.
The fact that there was a lot of post Covid, front ending in many categories, which is yet to really unwind and therefore discretionary demand, except for autos continues to be challenging and then the commentary does not seem to change from whatever we have heard so far.
Yes, there is upside in the margins and that is what is driving the 15% consensus earnings growth for next year. In a situation where demand is weak, there is a risk that companies may choose to pass on those margin benefits to consumers to get more volume and some of those margin benefits may not get realised. On the other hand, if you look at an investable group of companies or high quality companies, valuations individually are not cheap. Some of the manufacturing companies are now trading almost like consumer companies in terms of valuation. This is a situation which is ripe for volatility. You could see some earnings challenges, maybe not on the broader market but individual companies earnings upwards and downwards revisions could be fairly dramatic. And that always leads to volatility, at least at the individual stock levels. So, yes, I do not think volatility has gone away but you are right from a one year perspective, most of the concerns have receded and therefore we remain constructive on the markets. We think the markets will track earnings growth from here.
You are still constructive on the market. Most of the worry you believe is out of the picture, but cannot say the same about IT sector? There are a lot of concerns with respect to the fact that growth might slow down further, there could be a further de-rating of the sector. How are you approaching the IT pack, still remain bullish?
You are absolutely right. I think between the beginning of the year and now the situation on the IT side has changed dramatically. And that is because the smaller US banks seem to be struggling and therefore, the demand impact from that category has impacted both large and small IT players. So we are cautious on the IT space, we will look at it individual stock wise.
Each stock has to be looked at from the perspective of three things; one is, near term demand and the possibility of further earnings revisions where that is a risk. Two, where valuations are and on that front many high quality stocks have de-rated significantly so in that case you will see some stocks where near term outlook may be weak but valuations could look compelling.
Once you combine these one has to take an individual stock based view. One also has to look at which segments each IT company is exposed to and take a view on that basis. I do not think the broader sector will give you a rally if you just buy the index. I am not sure that it is a good idea as one has to look at each individual company.
And while the broader index may not do well, there could be some companies which could provide compelling returns in the next one year.
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