“Some degree of correction has already started to happen in the broader market. 225 stocks of the BSE 500 have already corrected 15% or more. 100 stocks have corrected more than 25% from their 52-week highs. The headline Nifty, however, is in a different zone. The correction is not visible if the focus is on key indices,” says Gautam Trivedi, Managing Partner, Nepean Capital.
Five big brokerages, based on data and historical averages, are now making a claim that the best of the year is behind us. Is it time to go easy on Indian stocks and could we be in for an earnings downgrade rather than earnings surprise?
Let us look at the ingredients that have actually caused the Nifty 50 to rise as much as 140% and more since the lows of March of last year. All of those ingredients are pretty much in place — low interest rates, global liquidity, liquidity in India, easy access to the market via your smartphone, e-KYC, zero commission brokerages and broadband speed. In 2020, foreigners and FIIs basically drove flows into the market and caused the market to rally 80% from the bottom. This year it has been the local investors. I do not see the trend getting disrupted any time soon.
However, one thing that has changed is the fact that people are starting to come back to work and so the work from home culture is starting to get diluted. For people who are not in the financial industry and who were trading the market, it was easy to do this from home because you do not have your boss looking over your shoulder and saying what are you doing, you should be working. So, the trading culture to some extent will get impacted but at this point of time, I do not see that as a significant reason for a correction in the markets.
Sensex PE multiple is 50% higher than historical averages. Margins will remain under pressure because of high energy costs which account for almost 25- 40% of the cost. When data show that good quality stocks have reached PE multiples of 50, 70 times or even 100 times, future returns are compromised. How would you ignore that?
All that you said is absolutely true. Even in the US, equity holding now makes up for more than half of the $109 billion financial assets that households own and that is a 70-year high. So clearly a lot of records have been broken whether it is in India or overseas. I am not even getting back to that.
The fact is that I do not see a major correction happening. We have launched a new fund and if there is a correction, I will be the happiest person. But I do not see a major correction happening for the reasons which I entailed.
The other thing to keep in mind is that in the BSE 500, some degree of correction has already started to happen. 225 stocks of the BSE 500 have already corrected 15% or more. The headline Nifty is in a different zone. But some degree of correction has set in the broader market. Apparently 100 stocks have corrected more than 25% from their 52-week highs. So some correction is already underway in the markets which is not visible if the focus is on key indices.
Where do you see potential areas of growth?
Let us not look at the absolute stock price, but let us look at earnings. There are sectors like financials, real estate, where there is significantly more momentum. We are quite bullish on these two sectors. Add to that cement. There were some disappointing numbers because of raw material cost hiles but that will start to even out over the next few quarters. These are the three sectors that we are pretty positive on.
Where do you stand in terms of the IPO euphoria?
I will tell you where I see a couple of issues with the new tech companies. First and foremost, let us not forget the valuation metrics for India’s new tech companies whether it is Zomato or even IRCTC, Nykaa and some of the other ones that will soon list. They are driven by the valuation metrics of the United States. So the question is how long will Indian investors, who are traditionally used to seeing companies as being not just EBITDA profit but even net profit positive, will tolerate these losses?
Zomato second quarter numbers show revenues were up 145%. But losses actually doubled and adjusted EBITDA loss was Rs 311 crore. It has been over three months that Zomato got listed and the market cap is sustaining above Rs 1 lakh crore. Nykaa is already above Rs 1 lakh crore. The question is how long will this sustain.
The second issue that I have is with the exception of Nykaa, for other new tech companies that are going for IPOs or have already got listed, the majority of the owners are actually private equity or venture capital funds who are exiting via an OFS. Unlike Nykaa where Falguni Nayar owns more than 50%, the founders of these companies are actually down to single digit in terms of shareholding. We will see a continuous supply as the investment horizon for a lot of these BCs and private equity funds is finite unlike a traditional company, where institutional investors hold stocks for 10 to 15 years. People have been owning HDFC Bank for over 20 years and have done extremely well.
So these are some concerns that I have. But I think new tech is here to stay. It is going to be an integral part of our economies and integral part of the Nifty 50 at some point of time. But valuations will have an impact at some point.d
So just building on that point where you are seeing that the tech companies are here to stay but we have to watch out for their valuations, the PE multiples. The opportunity can also be found in existing companies that are getting digitised and are trying to be the transformers. What would you bet on?
I would bet on
for the NBFC industry. Thus is one company that is going to reinvent itself as a digital company and that would be my number one choice.
Bajaj Finance is coming out with an integrated platform which is going to tie up with healthcare, insurance and others. It is also being seen as an early pioneer for “buy now pay later” trend. After the earning season, do you think the churn will see financials and real estate stocks come out on top? What happens to IT?
A lot of investors are asking the same question on IT. TCS, available at 29 times, is not ridiculously expensive. Also, the IT companies have clearly reinvented themselves. They have got into new verticals like cloud computing, AI, 5G etc and the fact is these companies are run by extremely smart and intelligent people. When they see that the traditional businesses are slowing down, they are quick to respond and as a result, we have seen a rerating happen. So may be a TCS at 29 times FY23 PE could be potentially the new normal.
In real estate, given the amount of money that is being made by retail investors in India, this calendar year you will start to see people taking profits. Some stocks have already started correcting from their 52 week highs and that means somebody out there is taking a profit. In every bull market, money comes into the property market and the last 7-8 years was a disaster for the property market which is now trying to come back with a bang.
I recently met with a large dealer of marble and granite invest in India and he said he has not seen this level of business in the last nine years. So clearly that is an indication of how fast the property market is coming back. Moreover, the second quarter results for Macrotech, Sobha were great. We are starting to see the sector emerge and cement is one of the best ways to play it.