While the Nifty 50 is trading slightly below its 10-year average valuation, its composition still reflects the India of the past, with significant weightage to sectors such as IT services, consumer staples, oil & gas, and banking, said Sunil Singhania, chairman and managing director at Abakkus Asset Manager Pvt. Ltd. So, the index can deliver decent returns, broadly in line with India’s normal gross domestic product (GDP) growth, but may struggle to generate very high growth, he added.
On the contrary, mid-caps and small-caps will represent India’s future, so growth will be higher, he added.
Q 1) Globally, bond yields are rising, and there is some fear about outflows. What is your take on the market at this point?
The near-term challenge is that the West Asia conflict does not seem to be settling. The situation has become increasingly unpredictable, and that uncertainty is causing concern across multiple economies.
With the situation in West Asia remaining unclear, there is a broader view that oil prices could remain at sustainably high levels. Higher oil, freight, and logistics costs are contributing to global inflation, including in the US. The general view is that inflation could remain sticky until there is some resolution to the conflict.
Bond yields are reflecting that uncertainty, and in India, the market is increasingly pricing in an interest-rate hike.
There is also more anxiety in India because, after two months of FII (foreign institutional investor) inflows in July and August, September has again been challenging. Despite around $135 billion of FCNR (foreign currency non-resident) deposits coming in, the rupee had depreciated to around 94.50 and is now moving closer to 96. FII flows have, therefore, taken a breather.
Our view is that the challenges are predominantly concentrated around the West Asia conflict. If a resolution is reached sooner rather than later, oil prices could fall significantly, and inflation concerns would recede.
Otherwise, GDP growth and corporate profit growth remain reasonably strong. The monsoon has been somewhat weak, but sowing is only about 1% below normal, and there is still hope that the winter crop could be normal.
Q 2) So far, mid-caps and small-caps have outperformed large-caps, while large-caps have languished for the last two years. How do you look at them?
Larger companies have underperformed. Returns ultimately follow earnings growth, and segments with higher growth tend to command higher valuations. The challenge is that while the Nifty is now slightly below its 10-year average valuation, its composition largely represents the past India. You have IT services, consumer staples, oil and gas, and banks, all of which have relatively limited growth. So the Nifty can deliver decent growth, perhaps in line with India’s normal GDP growth, but not very high. Mid- and small-caps represent future India. You have precision manufacturing, renewable energy, EVs, defence and other emerging sectors where growth has been higher. That is why these stocks have performed better.
Q 3) So how should one’s portfolio look?
Having said that, a significant portion of the mid- and small-cap basket is in a euphoric zone, with investors buying purely on themes and stories. One has to be very careful there. But there is also a good set of companies that can grow faster than India’s GDP over the long term, with valuations justified by the next three to four years.
The challenge is that while the Nifty is now slightly below its 10-year average valuation, its composition largely represents the past India. You have IT services, consumer staples, oil and gas, and banks, all of which have relatively limited growth. So the Nifty can deliver decent growth, perhaps in line with India’s normal GDP growth, but not very high.
Mid- and small-caps represent future India. You have precision manufacturing, renewable energy, EVs, defence and other emerging sectors where growth has been higher. That is why these stocks have performed better.
Having said that, a significant portion of the mid- and small-cap basket is in a euphoric zone, with investors buying purely on themes and stories. One has to be very careful there. But there is also a good set of companies that can grow faster than India’s GDP over the long term, with valuations justified by the next three to four years.
Q 4) On the new Irdai consultation paper, given that financials account for almost 35% of the Nifty, could this become a concern if the proposals are implemented?
Regulators are there to ensure the sector’s systematic growth. We have seen multiple instances where regulations may not be welcomed by the industry initially, but ultimately help the sector grow.
From a banking perspective, these businesses have been important sources of fee income, so there could be a knee-jerk reaction. But this is only a consultation paper, and there will be discussions before anything is implemented.
So the impact cannot be assessed yet. We have to see how the proposal is finally implemented.
Q 5) BSE All Cap Index, and around 53% of the stocks are trading at more than 30 times earnings. When everyone says this is a bottom-up, stock-picking market, do you think this kind of valuation supports that view?
When you look at index P/E multiples, particularly for mid- and small-caps, they don’t always give you the right picture because there are many loss-making companies in those indices.
Within any portfolio, some companies may be more expensive.
In those cases, the growth has to justify the valuation. If a company is growing at 5%, we won’t pay 25 times earnings. If it is growing at 20-30%, we may be willing to pay 40 times because the growth can justify that valuation over two or three years.
You have to marry valuation with growth. But if a company is trading at 100-200 times earnings based purely on hope, that is very difficult for us to invest in, given our investment philosophy.
Q 6) On private-sector capex (capital expenditure), the government has been doing the heavy lifting, but we are now seeing private capex pick up. Do you see the risk that higher funding costs will affect that?
Private-sector capex is picking up, but over the last one and a half years, external uncertainties have made entrepreneurs more defensive. But corporate India’s balance sheet has never been better. Defaults are low, and debt-equity ratios are among the healthiest we have seen.
Capex is continuing across autos, steel, aluminium, renewable energy and battery storage. If the external environment becomes clearer, capex intensity could increase significantly. The main concern would be a sharp rise in the cost of funds, but so far we haven’t seen that.
