Asset Allocation: ETMarkets Fund Manager Talk: India May Be Expensive, But Delivers Better EPS Growth in FY23-25: Kashyap Javeri

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“We can keep a sectoral approach when selecting stocks. A portfolio focused on large caps looks attractive and some mid and small cap companies can also be added,” says Kashyap JaveriThe head of finance, Emkay Investment Managers Limited.

In an interview with ETMarkets, Javeri said, “We think the consumer theme in India will do well. The auto-auto auxiliary space is a space where local theme players can choose companies like , and Bajaj Auto” Edited excerpts:

We managed to hit 60K on Sensex and 18000 on the Nifty. Do you think the worst is now being assessed in terms of geopolitical concerns, rising rates, inflation, etc.? ?
While Samvat 2079 started on a higher note, it is more relative in nature. The Nifty50 index has been stable over the past 12 months, reflecting a weather correction.

However, many other emerging markets (EM) such as Indonesia and Brazil have seen positive returns over the past 12 months. Thus, the 12-month performance of the Nifty50 index was mixed.

Coming to more real numbers, even though inflation in India has remained true to the reported numbers, the pace of the rise has slowed.

Thus, input prices (i.e. metals and minerals) within the WPI have declined over the past 5 months. The core CPI has been stable for 4 months and does not increase.

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Thus, we believe that the worst of inflation is behind us. However, Indian manufacturing will need to be nimble in adding capacity over the next 4-5 years as demand trends look very strong.

In light of easing inflation concerns, rate hikes to some extent are also a response to rising global interest rates, as we cannot lag behind other economies.

The spread between the US 10-year GSEC and the Indian 10-year GSEC should be around 400 basis points so as not to affect global debt fund flows.

After the recent correction, the benchmarks are only 3-4% away from the respective highs? How do you see valuation accumulating relative to other emerging markets?
As we suggested earlier, although our benchmark Nifty 50 index was flat year-over-year, few emerging markets did even better.

The performance of the stock market will be the result of both the evolution of economies and valuations. I think Indian business leaders and politicians have responded very well to the fallout from COVID.

Let me elaborate – (1) Indian companies have well sized costs and balance sheets post COVID which means cash returns on invested capital have improved significantly and at 15%+ CROCI is the best leverage over the past 15 years (2) for Indian companies have improved very well, with the D/E ratio of the ESB500 ex BFSI falling from 0.9x to 0.6x in FY 2017-22 (3) the government is doing its part with supply-side spending responses as FY21-26 slides towards double-digit Capex growth (4) financial companies are in as good shape as FY03-08 with an all banks Tier I ratio >10% and provision coverage >75%.

When this type of structural change occurs in the economy on the positive side, the stage is usually set for the next 5-7 years for excellent economic performance and a consequent positive impact on stock markets.

I need not remind readers that similar changes occurred between FY98-03 and the behavior of the economy and markets between 2003-10 (ex-GFC year).

In terms of valuation, while India remains the most expensive at 22x TTM earnings, it also offers better EPS growth in FY23-25, and so on a PEG basis we’re not too expensive compared to other emerging markets.

What are your thoughts on the September quarter results that have come in so far? Do you have more downgrades than upgrades in the next quarters?
The figures for most of the sectors concerned were excellent. For example, autos, BFSI and IT all performed better than expected, while metals stocks are expected to see downgrades.

I think that since more structural sectors (and with a higher weighting in the index) like the former perform better on earnings than later (like metals, mining, oil and gas), this will be broadly positive for earnings growth.

The rupee has been everywhere. Much has been said about depreciation and appreciation. Where do you see the currency headed? And does this also mean that companies with high dollar debt will be under pressure?
The highlight of the INR movement is its appreciation against many other DM currencies like EURO and GBP.

While the RBI has been spending a good amount of foreign exchange reserves to accelerate the depreciation of INR against the USD, two things are very important (1) the decline in foreign exchange reserves, as 16% of foreign exchange reserves opening fiscal year 23 is one of the lowest expenses in history to defend. the INR and (2) while globally every currency is battered and bruised against the USD, one cannot and should not expect the INR to behave differently as the competitiveness of our exports in depends a lot. A stronger currency and competitive exports cannot go together.

What sectors are you optimistic about and why?
We are optimistic for the manufacturing industry in India in light of the reasons mentioned above, namely improving productivity, stronger balance sheets, strong government CAPEX and the availability of funds to expand capacity through a robust financial system.

Some sectors where we believe strong earnings growth is expected are automotive, capital goods, building materials and consumer goods. We are also generally bullish on BFSI.

Diwali adds glitter: 39 tonnes of gold worth Rs 19,500 crore sold this Dhanteras, up 30% year on year. Households are always tempted to invest in gold rather than stocks. Or it would be wrong to equate the same as both are for different purposes. What are your views?
Although I am not an asset allocation expert, I would see it differently. The Indian consumer who spends such amount of money on discretionary expenditures like gold jewelry and housing is the manifestation of high income and wealth growth.

The Indian consumer has been completely absent from the action for many years and this time the consumption frenzy continued even 12-18 months after the unlocking phase (post delta wave). It is no longer revenge or latent purchase. The Indian consumer is back in force.

How to play small and mid caps?
The premium that Indian small and mid caps used to command over large caps has still not returned to its peak for various reasons.

Over the next few years, as small and mid caps also reap the benefits of the structural changes mentioned above, we expect them to do better than large caps.

Over the next 4-5 years we will see strong performance from quality small and mid caps.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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