Paharia says that while the markets are running ahead of fundamentals, a segment of the market is offering a lot of opportunities. It is the high-quality and high-growth segment of the market. They have positioned in that segment. He thinks there are opportunities in sectors like the IT sector, the consumer discretionary sector, and niche sectors like specialty chemicals and healthcare.
Post Q1 numbers and the kind of numbers that at least Nifty 50 companies have come out with, the consensus view is that Nifty is fairly valued at this price point and may be factoring in FY26 earnings as well. What is your view?
Vinay Paharia: We believe markets are running ahead of fundamentals and we have borrowed returns from the future and this is more pronounced as you go down the cap curve. It is the least pronounced in large-cap companies like parts of Nifty. But as you keep going down the cap curve to midcaps and small-caps, clearly the valuation discomfort keeps on increasing.
There are pockets of microbubbles in the smallcap and midcap segments of the market. But having said that, there are some good opportunities for investors looking for a long-term investment. So, net-net, clearly on the margin, markets seem to be overvalued, especially on the smallcap and midcap side of the market. Also, there are certain peculiarities in the lower quality and low growth segments of the market. So, that is what is bothering us.
But next month onwards there is an expectation that we might enter the rate cut cycle in the US markets. How are you expecting the markets to receive this particular news flow as well as what could be the likely reaction in the emerging markets and especially Indian markets as well, what is your sense?
Vinay Paharia: Markets have already discounted a rate cut somewhere in the next six months in the US and also probably in India. However, what you should also remember is that there is a large quantum of capital that is flowing in from Japan into either India or the US or some of the other markets which are considered as risk assets. So, the recent increase in the rates by the Bank of Japan is going to lead to some of this capital going back into the home country and I think that is also a risk that you should counterbalance with the potential rate cut in the US Fed. So, yes, some positives, but you need to remember that certain negatives are already on the horizon.
When you believe the markets are decently valued, they have run up ahead of their time, but do you still manage to find opportunities or are you waiting for the right time? Which sectors are looking attractive to you? Are you weighing more heavily on the defensives right now or is there any other strategy that you are working on?
Vinay Paharia: While we think markets are running ahead of fundamentals, there is a segment of the market that we think is offering a lot of opportunity and that segment is the high-quality and high-growth segment of the market. We think that this is a segment that has de-rated substantially over the last three or four years. This is a strategy that has delivered substantial returns over the previous 20 years and we think that there are a lot of theoretical and practical reasons to back this strategy hence, we think there is a lot of merit in investing in companies that exhibit high-quality growth and high-quality returns on equity in their businesses on a sustainable basis, so that is a pocket of the market which we find very attractive across the cap curve, which means large-caps, midcaps, and small-caps.
So, we would want to, and in fact, have significantly positioned ourselves in the high quality and high growth segments of the market, which is relatively attractive and can potentially offer relatively better returns for investors soon. In terms of sectors, we think the opportunities lie in sectors like the IT sector, the consumer discretionary sector, and niche sectors like specialty chemicals and healthcare. These are sectors that also offer value and a lot of these high-quality, high-growth companies are concentrated in these sectors.What is your take on new-age tech companies and does any company still look good to you? We have a lot of these new-age tech companies like Paytm, Zomato, or even the recently listed Ola that are doing well. What is getting the interest back in these? Any sense there? And how are you seeing these companies moving ahead as well?
Vinay Paharia: When you look at all of these new-age companies, there is a very common thread across all of them. These companies have very limited capital requirements. These companies are growing at a very fast pace and at the same time, they also have a very high degree of operating and financial leverage. So, while some of them may appear to be loss-making or making limited profits today, investors are looking longer term and extrapolating the current higher growth into the future. As and when you do that, some of these companies may not appear as expensive as they appear today on a very naive basis. So, some of them offer opportunities. The markets are very smart and are priced from a futuristic perspective. So, some of them offer opportunities, but some of them might be expensive and overvalued.