Lohchab also says: “A lot of the stocks are looking expensive from a next 12-month perspective and that is why one needs to have more moderate return expectations in some of those preferred themes. Some names like Cummins, NCC, Sobha Developers, DLF, NTPC among the power utilities and CESC are some of the ideas where as a house we are still positive and we have them as part of our modern portfolio.”
Let us begin by discussing the market momentum. What is your near-term as well as medium-term outlook on the market?
Near-term, markets are looking fully valued, which has been our call for the last two-three months after this rally to almost 20,000 levels on Nifty. From here on, over the next six-nine months, upsides at the index level look fairly limited. That is why the action has shifted a lot to smallcaps and midcaps. Definitely, at the beginning of the year, they were looking more attractive than the largecaps, which was our call.
After this move, frankly, even small and midcaps are not looking like a basket case. Things have moved up out there. But still we are able to find some investment ideas across all market caps. But one should moderate or temper their return expectations from the market over the next six to 12 months and probably even a little bit longer than that.
Given that earnings have completely normalised across sectors, Nifty earnings after FY24 will not be able to grow at anything more than 12 to 13% in our view. While valuations look only slightly above averages, one has to keep in mind that the earnings now are much higher than what they were at any time in the last five-six years, when earnings were depressed across a lot of sectors.
If you put both these things in context, then return expectations from here on should be moderate. If that is the case, then you are still able to find investment ideas across multiple themes and sectors. But one has to be prepared for some bouts of volatility in between but this sort of a strong upmove in small and midcaps may not continue at this pace and there might be some volatility towards the end of the year and going forward.
So keep realistic return expectations from the market here on and midcap volatility might come into play at least in a few months’ time. You talked about earnings and that point is taken. But are you completely ruling out the possibility of a pre-election rally because that has been the historic trend of what a 10-15% move ahead of that?
We have already seen that from March to September-October and so everybody was expecting that probably there will be some more consolidation for next six months and then we might have a pre-election rally. But it seems like that has got accelerated and it happened in the first six months of this financial year itself. So from here on, I would be surprised if we get another 15% rally in the next six months.
So you believe a large part of the rally has already played out in the last three months itself and yes it has been a very solid recovery that we have witnessed in the market from the March lows itself. But let us get sector and stock specific.You said that you are finding investable ideas across all categories. Let us start with the largecaps. Which are those pockets of stocks that you like within the largecap category?
We are still able to find investment ideas across most sectors as well as market cap, so when I look at say the big sectors, thankfully the two largest sectors, banking and IT which together are 50% of the Nifty weights, are not looking hugely overpriced. Valuations are reasonable in both of them, and therefore you know we have a few investment ideas, across banks, NBFCs and we like stocks like Axis Bank and ICICI Bank.
Among NBFCs, Chola has been one of our top picks even though it has moved up sharply but we are fostering the medium to long-term prospects out there. In IT, in largecaps, Infosys seems fine to us after the weak performance in the last two quarters, so valuation wise that is looking good. Among the midcaps we have LTI, Mindtree, Persistent which are now no longer midcaps, they have become fairly large companies but they are one of our top picks in the IT sector. Some of the themes which we believe are more positive from an economy perspective and where there are probably greater tailwinds like the whole investment theme we have been fairly bullish on over the last couple of years, we have been preferring that over consumption. Out there sectors like infrastructure which is construction, capital goods, power and utilities, real estate, building materials, are sectors where we are positive and we have been running an overweight in our model portfolio.
In fact in all of them, there are enough ideas across largecaps as well as mid and smallcaps. In fact some of them there are more mid and smallcap ideas and we are preferring another such area is exchanges where there are only midcaps but we like that space as well where you have MCX and BSE.
Other than IT and bank, you say within the capex theme there are a lot of ideas as well. Within capital goods, the likes of defence, railways, even power have seen quite a bit of run-up. Which are those names that come to mind as investable ideas?
So you are right, it is no longer a basket case as I said the same stock picking six months or one-year back was much easier in those spaces because they were not discovered. Obviously a lot of the stocks are looking expensive from a next 12-month perspective and that is why one needs to have more moderate return expectations in some of those preferred themes. Some names like Cummins, NCC, Sobha Developers, DLF are still stocks, NTPC among the power utilities and CESC are some of the ideas where as a house we are still positive and we have them as part of our modern portfolio.
Cummins, NTPC, CESC are some of the names and pockets where you still see some sort of upside left but consumption is a space that you have been tracking for many years. Why are yiu underweight there because at least premium consumption seems to be picking up whether it is in terms of QSR, hospitality and even premium buys like Ethos, Landmark etc. What within consumption looks weak to you?
The reason for being underweight on consumption is actually twofold; one is the relative picking where can you make more money. It is not that in consumption, we are not positive on anything but it is just that we have less investment ideas from consumption space because we finding more attractive and greater earnings traction in the non-consumption or the investment themed space.
Second was the valuation part. The starting point of valuation in some of those other sectors was much lower and even today consumption stocks are trading at fairly rich valuation especially the consumer discretionary ones where structurally the tailwind is there but valuations is a concern in some of the themes like QSR and other consumption themes. From that context, we are underweight. You are right that premium consumption is doing well but we believe those stocks are anyway pricing that in and therefore we are not able to kind of have high conviction on some of them or margin of safety is slightly on the lower side right now.
But we do like some names like United Spirits is one of our top picks in the consumption space and then in discretionary space we like Crompton Consumer which is part of our model portfolio along with United Spirits. We are positive on hotels as a theme . We have a positive rating on both Indian Hotels and Lemon Tree, I would say that there are fewer names on the consumption side compared to on the investment and infra side and therefore you know slight preference still tilted towards non-consumption stocks.