Edited excerpts from a chat:
Given the valuations Dalal Street is trading at and the stellar returns that investors have made in the last few years, don’t you feel the urge to hoard large amounts of cash at this stage?
Hoarding large amounts of cash might seem tempting, especially given the high valuations and the impressive returns we’ve seen on Dalal Street in recent years. However, while it’s crucial to recognize the cyclical nature of markets and the potential for corrections, our approach at Niveshaay is more nuanced. Rather than making broad market timing decisions, we focus on selectively identifying opportunities where the risk-reward balance remains favorable, even in a high-valuation environment. We also emphasize the importance of capital preservation, which means we may consider adjusting our portfolio to mitigate risks, but we avoid the binary approach of going entirely into cash. Instead, we continue to invest in companies with strong fundamentals, resilient business models, and the potential to thrive even if the broader market conditions become less favorable. This strategy allows us to remain invested and benefit from the long-term growth potential while being cautious and adaptive to the changing market dynamics.
Which pockets of the market are you hunting for stocks at this stage? How tough is it to find stocks to buy at reasonable valuations?
Finding reasonably valued stocks in the current environment is indeed challenging. We are focusing on sectors that may not be in the spotlight but hold strong long-term potential. This includes industries with structural tailwinds like renewables, energy transition, recycling, or manufacturing industry. Additionally, companies with strong balance sheets, consistent cash flows, and competitive moats are still attractive, even if valuations are somewhat elevated. Paying a premium for such companies is often justified, as their long-term growth trajectories are underpinned by sustainable business models and resilient earnings potential. This approach ensures that investments are aligned with enduring value creation, positioning portfolios for success beyond short-term market cycles.
Do you think that the market’s fancy for rail and defence stocks could be tested in the rest of FY25?
The market’s enthusiasm for rail and defence stocks in India may face tests in the rest of FY25, particularly if companies struggle to meet the elevated expectations due to execution risks and high valuations. However, the long-term outlook remains positive, supported by strong government initiatives, continued infrastructure development, and a push for self-reliance in defence. These sectors are likely to see sustained investment and growth opportunities, particularly as India continues to prioritize expansion in these areas. While short-term corrections could occur, the structural growth drivers suggest that rail and defence stocks could continue to offer attractive opportunities for long term investors, especially those focusing on companies with strong fundamentals and clear earnings visibility.
Recently listed start-ups like Ola Electric, Unicommerce, and Firstcry have got a good response on Dalal Street. What’s clicking now?
Earlier, there was considerable skepticism toward these startups due to concerns over their lack of profitability and high cash burn rates. However, companies like Zomato have paved the way by focusing on achieving profitability and maintaining strong market leadership. Zomato’s success in turning around its financials and its strategic growth initiatives have inspired confidence in the potential of other startups. As these companies demonstrate clearer paths to sustainable growth and profitability, investors are beginning to see them as viable long-term investments rather than speculative plays. Additionally, their ability to adapt to market demands, leverage technology, and scale efficiently has further solidified their appeal. This change in perception has led to a more favorable reception for these startups on the stock market, as investors now appreciate their growth potential and the strategic advantages they bring to the table.
How are you going about picking winners in the green energy space?
In selecting winners in the green energy space, the approach centers on identifying companies with a strong market position, innovative technologies, and a demonstrated path to profitability. Companies that lead in their niche—whether in renewable energy generation, energy storage, or electric vehicles—are prioritized, especially if they show financial resilience and consistent growth. Additionally, companies that benefit from favorable government policies, subsidies, and regulatory frameworks are key targets, as these factors can significantly boost their growth prospects. Beyond direct players, attention is also given to ancillary industries that supply critical components or services to the green energy sector, such as battery manufacturers and energy efficiency technologies. Evaluating sustainability and ESG practices is crucial, as companies with strong commitments to these areas are more likely to attract long-term investment and face fewer regulatory challenges. Lastly, companies with scalable business models and strategic partnerships that enhance their innovation and market reach are considered top picks, as they are better positioned to thrive in the evolving green energy landscape.
Given the long growth runway ahead, do you think power financers are trading at reasonable valuations?
Power financers are well-positioned to benefit from the long growth runway in the power sector, driven by increasing demand for energy infrastructure and the transition to renewable energy sources. At Niveshaay, while we don’t specialize in financials and our domain knowledge in this area is limited, we remain optimistic about the overall prospects of the power sector. It’s crucial to examine factors like asset quality, lending practices, and exposure to stressed assets. Companies with strong risk management practices, diversified loan portfolios, and a focus on financing green energy projects are likely to offer attractive risk-adjusted returns. We believe that ongoing investments in energy infrastructure and the shift towards sustainable energy solutions will continue to create significant growth opportunities in this sector.