What is your reading of the market now?
A healthy correction is on. Right now, market trends are a lot dependent on the trends in FII behaviour. When FIIs were buying continuously for 15-20 days last month, it took the Nifty to nearly 20,000. Now, they are selling and there is a reversal. So, it is just the technical nature of the beast, that the market extends itself and then corrects. Though corporate earnings have surprised, valuations are not very cheap and so markets will consolidate. By the time it is the second quarter, the market will run up again.
What are your foreign fund clients telling you about Indian equities?
The sense we get is that the India story is unparalleled. When all large economies like the US and China are having problems and India is saying it will grow at 6-7%, it is bound to be treated as an outstanding market. But the markets are not cheap either at the current (price-to-earnings or PE) multiple of 20-22 (times). All the optimism is there in the price. FIIs want to enter with big buckets of cash but the real challenge for them is what to buy.Fund managers are worried that they will deploy at the current high PE and then the market corrects to 15-16 PE or the currency collapses. The issue is that there is no margin of safety if they buy big quantities at current levels. The story is good, but the market is also well-priced.
What can ease the upward pressure on market valuations?
I think the supply side is still constrained. That’s why our markets are continuously trading at multiples of 20-22 times. Sebi is clearing all the IPOs wherever possible but we need more supply of papers be it PSUs or other companies. Sebi should bring in more changes in terms of the time taken and efforts to tap the market or even how intermediaries should act. There is a need to look at how underwriting in IPOs should happen. There is clearly a retail investor boom and so, the question is why should the majority of the IPOs be underwritten only by institutional investors? Why can’t 50-60% of an IPO be underwritten by brokers representing retail investors?
How will markets behave in the run-up to the state elections and the crucial general elections of 2024?
The picture is so perfect that there is a chance of something going wrong. One of the important things about the Indian story is that after a long time, we have a majority and a stable government. It is a government which wants to deliver and is working very hard. There is a lot of optimism about the current dispensation coming back to office but a lot of it is already built into the market price. Nobody can say with 100% surety that the same dispensation will continue. As the state election results keep coming out, people will also start tuning their expectations. Another aspect is this dispensation coming back to office is fully priced but what is not is the current dispensation coming with a full majority. My sense is that there is a likelihood of a 15-20% rally in the market if that outcome happens. So, the day on which the market is sure that what it wants is going to happen, it will go up by 15-20% and it will take everybody by surprise. Till then, the markets will be on the edge.How will foreigners react to the uncertainty around elections?
In current conditions, it looks like they are not greatly interested because of the uncertainty. At the current valuation, they might be kind of iffy. They will not sell, but they may not also put in big bucks, but the scene changes the moment they sense something in the political setup. I will be surprised if FIIs become very aggressive unless the political wind does not become more favourable for the current dispensation.
Is the best for bank stocks over?
In my understanding of the last 30-40 years, I have not seen the banking system as a whole – private as well as PSUs – in such a strong situation in terms of their balance sheets, profitability and provisioning. In the last 3-4 years, whatever lending you have seen is mostly retail. Most of the corporates are not borrowing except for a little bit of working capital. The private capex is very limited right now. Since the lending on the corporate side has been very limited, growth can slow down but I don’t see any danger to the banking system in India right now. From the valuations point of view also, they are comfortable.
How do you expect HDFC Bank to perform after the merger?
The businesses are going to do well. How the markets will react to the supply of paper because of adjusting weights (on the indices) on account of the larger allocation is a bigger challenge. Investors had tons of HDFC Bank as well as tons of HDFC even before the merger. Now, in the merged entity, institutional investors especially mutual funds cannot have 18-20% of their portfolios. So obviously, they will cut it down to say 10% or 12%. In that process, you’re seeing a lot of supply of HDFC Bank coming in. You need new investors to absorb that supply. That process must be underway right now. But I don’t see any problem in their core performance per se because their distribution is so good and they have a low cost of funds. So, it’s just the relocation of the holdings in the mutual funds. That can slow down the influx of more investors into the counter.
What is your assessment of IT stocks?
The sector growth has come down from 15-17% to maybe 10%. But valuations have not corrected that much. The PE has come down from 35 times to 26-27. Now this new thing, which has come up suddenly in the last six months, is AI (Artificial Intelligence). Will this hurt Indian companies or will it be beneficial? The jury’s yet to be out on that. I am reasonably sure that AI on the whole will be beneficial to Indian IT. But the question has been which company. One thing is the market is clearly getting aligned with specialised mid-sized IT companies, which are going to benefit from AI. It could be that large-caps might suffer in the hands of mid-caps, or a few companies might take the lead. So that is the uncertainty in the sector.
Do you see more upsides in shares of new-age businesses after the rebound?
The bounce-back has been rapid and maybe they have done enough for the time being. The ones who don’t deliver will be punished disproportionately. These businesses will become big, but it will take time also for them to justify the current valuation. It’s true that the market is confused about how to value them but they are clearly looking at discounting multiples for 2027 or 2028. Before the correction, they were discounting multiples for 2032. But, there is still some froth there.