In an interview with ETMarkets, Tiwari, said: “Avoid companies trading at high valuations and focus on those delivering good earnings growth and cash flows but trading at reasonable valuations. The margin of safety is more important right now” Edited excerpts:
We have seen a dream run on D-St with Sensex hitting 67000 and Nifty50 heading towards the 20,000 marks. Is this too good to be true and we are running ahead of fundamentals?
India has seen massive FII inflows from March to till date July of almost US$ 19.2bn vs net outflow of US$ 3.4bn in Jan-Feb and outflow of US$ 18.4bn in CY22.
It is one of the major reasons behind the sharp rally in markets. India’s fundamentals are good in terms of recovery in the manufacturing sector over the next few years driven by localization of imports and export opportunities emanating from China +1 as well shifts from Europe.
After this rally, valuations are now stretching a bit and markets might remain sideways over the next few months.
Crude oil prices are still benign and have rallied 10-12% from April-May bottom; hence, one needs to be watchful of the same going ahead.
What do you make of the Reliance demerger and entry of Jio Financial?
Jio is well placed to scale up in financial services due to its huge database and connects with potential customers through its retail businesses.With its strong balance sheet and parent, the cost of funds will be low for the company. It has the potential to become a good value creator over a longer period.
Small & midcap spaces have also been doing well. China plus factor as well as fall in raw material price supported the sentiment. How should one play this theme?
Valuation of some of the mid-caps are now going into the expensive zone; however, there are still opportunities in small caps.
We are of the view that investors now need to be selective and look at stocks trading at attractive valuations as per trailing twelve-month earnings or stocks where RM correction is going to bring significant margin improvement.
One can also look at companies that have export exposure as supply chain normalization-related impact on demand seems to be behind and sales should recover going ahead.
Sector(s) which you think could get re-rated and why?
Rural India suffered the most post-COVID as income levels didn’t recover to pre-pandemic levels due to poor regional distribution of monsoon over 2021-2022 and unseasonal rains as well as the impact on jobs due to the pandemic.
Some of these are now reversing and rural is expected to recover going ahead, therefore we expect sectors dependent on the rural front to do well going ahead. Autos especially 2W and dependent ancillaries will do well in case of rural recovery.
Real estate is also in its cyclical upturn phase and therefore industries dependent on real estate like building materials will do well over the next 3-4 years as they see the benefit with some lag.
We are very positive about India manufacturing due to localization as well as export opportunities and hence this is also one segment worth looking for long-term value creation.
What is going on with the IT sector? Large cap vs midcap IT which space offers more room on the upside?
The near term looks challenging, but macro indicators from the US are looking good, earnings of BFSI companies, which is large customer segment, are coming good and hence IT sector pain might be of 3-6 months.
Deals wins reported by most of the IT companies are good, while discretionary deals are taking time to closure, cost take-out deals are happening. However, cost take-out deals take longer in terms of revenue conversion.
We expect an uptick in the IT earnings from 2HFY24 and FY25 could be a good year. Valuations have now become reasonable, we believe IT stocks will bottom out over the next 3-6 months, which is always difficult to time and hence long-term investors should look at this sector.
Midcaps operating in niche segments have done well, but considering valuations, we see more value in large caps at this juncture from a 1-2 year perspective.
The home building space has attracted some attention recently with companies like Polycab and Havells in focus. What are your views?
As highlighted above Real Estate industry is in a cyclical upturn and hence ancillary industries are likely to see good growth over the next few years.
Building materials, wires, and cables are some of the segments which benefit from it. In these industries shift from un-organized to organised is also giving an extra boost to growth.
Markets are at record highs and we see some consolidation – things that investors should avoid doing and keep in mind.
Avoid companies trading at high valuations and focus on those delivering good earnings growth and cash flows but trading at reasonable valuations. The margin of safety is more important right now.
What is your call on global equities vis-à-vis India?
India with its growth potential is much better placed vis-à-vis other developed economies, we see manufacturing to be a major theme in India over the next 5 years, and hence Indian markets are likely to outperform global equities over the medium to long term.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)