In an interview with ETMarkets, Kasat said, “We expect some tilt towards defensive sectors like FMCG, durables, building materials, IT services, pharma and telecom, given the high valuations in some growth sectors.” Edited excerpts:
After three consecutive months of positive returns, Nifty started September on a subdued note. What is weighing on D-Street?
The Federal Reserve is now in a position to cut rates at its next meeting, and the cooling labor market indicates that inflation is largely under control. Despite this, investors They are cautious
The market has already priced in a series of rate cuts, so attention is shifting to new concerns, in particular the expected economic slowdown that typically follows each business cycle.
All sectors have seen significant gains during this bullish period and from a historical multiples perspective, many sectors now look quite expensive.
This combination of high valuations and a potential economic slowdown is contributing to the current subdued sentiment on D-Street.
There has been talk of a slowdown, especially in the US, which could also spread to other developed economies. What is your view? What impact will it have on India?
Whenever there is talk of a slowdown in developed countries, the focus is first on Indian IT companies that derive more than a third of their revenue from those markets. The IT sector saw multiple improvements on the back of positive management commentary in the Q1 FY25 earnings, and the Nifty IT index is also up 30% on the back of expected rate cuts. The good news is already priced in. One will have to wait and see how things pan out in the US as elections are also underway and the DXY is at an all-time low.
Trump is against de-dollarization, the increase in crude production has been moved to December, there are many variables at play and exporting companies could see slower earnings growth as a result. We may continue to see sector rotation.
However, domestically focused companies are expected to be resilient as India remains one of the fastest growing economies. India’s retail inflation moderated to 3.54% in July 2024 (from 5.08% in June 2024), its lowest level in 59 months. This also puts inflation within the RBI’s tolerance limits.
Coupled with the IMF upgrading India’s GDP forecast to 7% in fiscal 2025, the stage is set for continued economic expansion.
Markets are hitting record highs – does this make you cautious or more optimistic at current levels?
We are cautiously optimistic. At current valuations, about 36% of the companies in the Nifty50 index are trading below their 2016-20 average level. Previously, this percentage was 44%. This means that more and more stocks are entering the high valuation zone.
We expect some tilt towards defensive assets such as consumer goods, durable goods, construction materials, IT services, pharmaceuticals and telecoms, given high valuations in some growth sectors.
Which sectors are you currently overweight or underweight in?
We believe capital goods, infrastructure, logistics/ports, EMS, hospitals, tourism, automobiles, new energy, e-commerce, etc. are big themes, but investors need to be aware of valuations.
We remain overweight in autos given the expected recovery in demand in the festival season, despite some weakness in PV vehicle sales in the past two months.
In the banking sector, we expect near-term headwinds like slow deposit growth, a possible cut in repo rate and tepid growth, however, structurally Indian banks remain in a good position.
We hope consumer demand to revive after the rainy seasons in the staples and discretionary segments, which makes us optimistic about that segment.
We remain underweight IT, metals and oil & gas as these sectors are dependent on external factors such as slowing developed economies, volatile crude oil prices and the dollar index.
We have seen many market cycles in the past and many investors tend to get stuck in them, either holding on to their money or investing new money at current levels. What should investors do if they plan to invest new capital?
Having seen many market cycles, I cannot stress enough that investors need to take a long-term view of India. India is the fifth largest economy in the world, up from tenth in 2005. By 2027, we are expected to reach $5 trillion GDP, with an upward trend in our per capita GDP as well.
Therefore, investors should systematically put capital into sectors with a broader thesis, and they will do reasonably well across all sectors.
How should one pick stocks, especially at a time when the market is trading near all-time highs?
We focus on sectors as a basket and then pick out names of individuals – government approach towards the sector, earnings growth, effect of capital expenditure on margins, if any, and valuation compared to peers are some key indicators to look out for.
What do you think of the recent IPOs that have launched? Have you seen any interesting names or companies?
In a typical bull marketCompanies are finding it easier to go public at slightly better valuations. The most recent IPOs are in sectors such as SaaS (UniCommerce), electric vehicles (Ola Electric), housing finance (Bajaj Housing), travel/tourism (Ixigo) and manufacturing (Gala Precision). With consumption and capital expenditure booming, investors can look out for more IPOs in the above-mentioned sectors.
The market regulator has warned investors against SME IPOs, but the sector has a different view. What is your opinion?
Small and medium-sized enterprises (SMEs) coming to D-Street in this bull market are making big promises of 35-40% profit growth, huge capacity additions, etc.
The multiples at which these companies are trading cannot be justified, unlike those of large companies with a proven track record of execution. Therefore, it is important to focus on their execution.
Investors who have not been able to get an allocation in major IPOs acquire a feeling of FOMO (fear of missing out) and rush to apply for SME IPOs.
The relatively smaller size of SME IPOs compared to large-cap offerings creates a sense of scarcity, which drives up demand and prices. Government initiatives aimed at promoting SME growth, such as Mudra Yojana, also give investors more confidence in SME IPOs.
While SME IPOs can offer significant returns, they also come with higher risks. That is why SEBI has expressed concern about increased participation in this space.
The National Stock Exchange (NSE) has added the condition of positive free cash flow (FCF) to equity for at least two out of three financial years as an eligibility criterion for listing on NSE Emerge. This ensures protection of investors as well as growth of SMEs seeking finance.
Let’s talk a little bit about valuations: are we expensive compared to our emerging market peers at current levels?
We are not cheap, but I would not like to say we are expensive. India’s market capitalisation to GDP ratio is 125%, compared to 196% in the US. South Africa, China and Brazil are below 100%, making it optically cheaper to invest in those markets, but India’s GDP growth rate is higher than all of them.
The Nifty50 is currently trading at 18.9x 1-year forward EPS, which is almost at par with the 15-year average of 19x. In the base case, we value the NIFTY at a 15-year average PE (19x) with EPS as on March 26 of 1411 and arrive at a 12-month target of 26820.
Bullish case, we value NIFTY at PE of 20.2x and hit an upside target of 28564. Bearish case, Nifty can trade at a 10% discount to LPA with a target of 24407.
(Disclaimer: The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of the Economic Times)
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