In an interview with ETMarkets, Ramu who manages AUM of over Rs 3500 cr said: “In the last 15 years, equities have generated substantial returns despite pressing issues related to global economics, politics, Covid-19, demonetization, GST implementation, etc. in India” Edited excerpts:
The market seems to be consolidating after hitting record highs. What is your take on the markets?
The market has seen a leg up in the last 4 months, after almost 18 months of consolidation. The market might revert to being consolidated in the mid-term.
Valuations seem neutral, being neither stretched nor very attractive, like the levels prevailing 6 months prior, at least from a short-term perspective.
Albeit the markets still offer opportunities to generate alpha, given an investment horizon of 3 years or more. The movement of indices seems to be dependent on the H2 FY 2024 earnings, in the short term.
What is your take on RBI rate action?
Rise of inflation is expected to drive a hawkish sentiment across markets. Recent volatility in vegetable prices, purely being a supply-side issue and hence transitory in nature, is the main driver responsible for the recent spike in inflation.
The effects of monetary policy tightening on vegetable prices are debatable. We expect the status quo to prevail in the near term, although sticky food prices can pose a hindrance to the consumption story. Any new age companies which you think could turn out to be the growth engines of the future?
We follow a particular framework to assess the future profitability of new-age companies:
1. The company should have a significant market penetration opportunity and a large Total Addressable Market to ensure long-term growth,
2. The business should be able to leverage the urban consumption story, banking on affordability/purchasing power increasing in urban centers, and
3. The company should have attractive unit economics. For example, in the food delivery space, restaurants can earn healthy gross margins of 65% – 75% per order, as there is a meager cost associated with servicing additional orders.
Thus, the restaurant can aptly compensate delivery platforms and delivery partners for online orders. On the other hand, the same is not the case with regard to grocery and pharmacy online business channels.
SIP contributions surpassed Rs 15000 crores and new SIPs are being registered every month. This gives D-Street enough ammunition at times when FIIs are selling. Do you think it showcases retail investors are here for the long haul?
Yes, we believe that the transition from savings to investments is a structural story. As the average household income levels increase, savings tend to increase accelerate further and investments tend to see a disproportionate increase in allocations, leading to larger inflows in equity.
Cyclicality is bound to prevail, but with every successive market cycle, the quantum of equity investments will grow manifold compared to the previous cycle.
We’ve observed that retail investors tend to enter the market post a high return period, therefore investors should ideally stay invested in equities for at least a 5-year period to reap the benefits.
What would you advise investors who are waiting on the sidelines to put in fresh money?
Never wait! If your investment horizon is more than 5 years, equities are an excellent asset class. In the last 15 years, equities have generated substantial returns despite pressing issues related to global economics, politics, Covid-19, demonetization, GST implementation, etc. in India.
Equities require a strong economic momentum to perform, the Indian economy has the potential to grow at ~6% in terms of real GDP and ~10% in terms of nominal GDP. Provided this is achieved, a >15% growth in certain sectors and earnings would be probable.
In the long term, Indian equities would provide an opportunity to make meaningful returns, purely based on earnings, even without the support of flows.
Most global organization have suggested that India will double its GDP probably by the close of 2030. Do you think consumption will be a big theme that could produce multi-baggers along with infra?
India’s nominal GDP is expected to double to USD 7 trillion over the next 7 – 8 years, showcasing a 10% growth.
The USD 3.5 trillion addition to the economy would be contributed by emerging sectors, which are not large currently and therefore do not form a part of large-cap indices.
Growth in these emerging sectors will set a precedent for value migration stories in the future. Currently, a large part of the Nifty 50 index is not an accurate representation of the India growth story, with many new companies expected to replace existing traditional businesses. Consumer Discretionary, Manufacturing, Digitization and Financial Inclusiveness are some themes/sectors that are expected to benefit, with companies within these sectors outgrowing the overall Nifty.
Although the Infra sector is a good bet, generating alpha in this space is difficult, being cyclical and highly competitive.
Any sector which you think is in the overbought zone? Which is the most undervalued pocket in the market?
Contrary to the consensus sentiment, we believe that sectors such as Capital Goods, Infra, and PSUs are in the overbought zone.
The market extrapolated the growth which occurred post Covid mainly due to supply-side constraints and margin benefits which kicked in post the China slowdown.
Although a positive sentiment prevails regarding private capex, the capex would not be able to support the growth being factored in the current valuations of the Capital Goods & Infra space. PSUs benefitted from low valuations and an earnings upgrade cycle.
The chances of further earning upgrades remain meek along with valuations hovering around the upper limits, and the margin of safety remains low.
What is your take on the recent IPOs which hit D-St? There is a frenzy, but it is not the same as we saw last year or the year before. What are your views and any company you are looking forward to?
We believe that the recent IPOs would end up facing similar fates to the ones that came in last year or the year before, wherein the stock prices saw sharp corrections, as earnings missed expectations, denting unreasonable valuations.
We remain patient and observant when it comes to IPOs and the frenzy around them, avoiding traps/risks such as companies overpromising but not being able to deliver.
We watch a cycle to play out rather than buying the companies we would like to include in our universe at higher valuations.
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