The market setup is absolutely mesmerising! Who would have thought that out of all the stocks, PSUs and smallcap stocks will rebound 15-20% from the lows of June 4? Why is that happening?
Ashwini Agarwal: So, it is a combination of who is driving the market and the fact that there has been very little supply and, of course, coupled with the new government’s comments that it is going to be more of the same of what we have seen in the previous policy. There is obviously a lot of focus on the government to drive the investment and revival in the defence industry and pursue the export opportunities and that is what is exciting investors.
There is very little supply. I would have imagined that given these valuations in the PSU space, the government might want to increase its disinvestment targets. But we did not see that in the last financial year, and I do not know whether the government plans to do that financially or not. But honestly the valuations are quite eye popping. No matter which way you cut it, I cannot get myself to agree that the valuations leave room for upside. But as we all know bubbles have their own mind and bubbles can get a lot bigger before they burst. So, who knows? There may be a lot of upside.You were there at the event. Every narrative was centred around growth visibility – be it from RBI, SBI, Puneet Chhatwal, Manish Chokhani, every market man we spoke to. So, if growth is looking so solid and if we are in for more surprises on the earnings front, then why worry about bubbles and valuations?
Ashwini Agarwal: So, you have a point. If you recall when we spoke last in early May at that time also my view was that there is really no cloud on the horizon and that was reiterated at the ET Now Conclave last evening where the RBI Governor and the State Bank of India Chairman pretty much said the same. So, yes, India is poised for growth. Corporate earnings are looking quite healthy. There is no stress on corporate balance sheets or bank balance sheets. Inflation is a bit of a worry, but hopefully the worst is behind us as the RBI Governor said.
So, there is no reason to worry. I agree with you on that and, of course, bubbles like I said can get a lot larger before they burst. But the point is that history tells me, and I go back to 1999-2000, I go back to 2007-2008, I go back to 2017 that the biggest mistake as an investor I can make is overpaying at the point of entry. If you overpay for a stock at the point of entry, the chances that you lose money or you do not make any money over a long period of time becomes higher. So, I am not saying that you do not have investment opportunities in this market. All I am saying is that there are certain pockets of the market which are enjoying euphoric conditions and where investors need to be a little careful because valuations do not support the stock price.
What could burst the bubble? I guess the next event that the market is going to watch out for is going to be the Union Budget, the first from the Modi 3.0 stable. And I am just looking at some of the data points. The long-term capital gains as well as the short term has been the highest growth income category in the last few years. While the market fears that hope that is left untouched, what is your anticipation?
Ashwini Agarwal: See, I do not know. I do not know what the government plans to do because if you recall there were comments by the finance secretary earlier on in the year and as well as the finance minister which said that there needs to be a rationalisation of capital gains taxes across asset classes and maybe they need to be brought down to a common platform. Now, what does that mean? I have no idea. Because I do not have the breakdown of how much the government collects from, for example, real estate capital gains or for example from gold sale capital gains. So, my thinking would be that A) the government would want whatever rationalisation that they propose to be revenue accretive or at least revenue neutral. So, on these things, I do not have the data to make an educated guess. So, let us see whether this happens this time or not. One big change is that unlike the previous government, this government has coalition partners and it will need to carry the coalition partners with it if it were to propose a big change to the capital gains tax regime and also that you have the Maharashtra state elections coming up, so whether the government is ready to do this now or whether they will wait another year, I do not know. So, yes, it is a risk and it is an event to watch out for, but I do not know how to position for this quite honestly.
Let us also understand what the outlook is when it comes to the entire the spaces that command fairly high valuations, for instance, be it FMCG or pharmaceuticals and one would imagine that when the market is seeing a bit of volatility, these are the spaces to cushion your volatility, but how would you look at the moves that we have seen within the space, the valuations that they command?
Ashwini Agarwal: So, I think the narrative on rural demand seems to be quite optimistic relative to what we have seen in the last two or three years. I mean, being optimistic on rural demand does not mean that it is going to be gangbusters. But the kind of low-single digit growth that we have seen in consumer name revenues, for example, might be a little bit better, maybe late single digits or early teens.
The margin environment has been quite benign for a few quarters already. We might see a revival in earnings growth in the consumer space. What you say is correct, that some of the consumer names are actually quite expensive, but if you look a little deeper there are a few stocks which do offer value. So, my suggestion or at least what I am doing, I cannot make any suggestions, what I am doing is looking deeper to find where I can get some growth and at reasonable value. It is a similar story for pharmaceuticals and pharmaceuticals, both the retail sales are doing well and the pricing pressure for generics in the main market for Indian companies, which is the United States, is more benign than what we have seen in the last three or four years.
So, there again with a filter of valuations I can see opportunities. But I think to my mind one of the big opportunities is actually in the banking space, which has not done as well as several other sectors over the last 12 to 18 months and I think the environment is very-very benign there. I mean, the SBI chairman said as much at your conclave last evening as well. That might be another space where one can look for some ideas where valuations are quite reasonable actually.
Continuing with that, where is it that you are finding valuation comfort right now and would you say that private banks are the only pocket as of now?
Ashwini Agarwal: I would say banks and NBFCs. I think there are some PSUs and private both and I think some of the NBFCs as well, that is one area where I am finding a reasonable amount of valuation comfort. I think there are a whole bunch of stocks in different sectors. It is chemicals, fertilisers, agrochemicals, pharmaceuticals, some of consumer names, some manufacturing names where I think there is a reasonable growth and you are not paying a lot for growth right now. You are not paying over the top.
This has again become a very bottom-up market. Sure, there are some themes running, such as the PSU, defence, railways and like I said, in my personal view, that is a bubble and how long it continues or how big the bubble gets, nobody knows. But outside of that, I think there are a lot of places where you see a reasonable outlook. This is not to say that markets are not expensive. They are a little above median from a long-term perspective and who knows if there is a big shocker on the capital gains front, we might see a correction. So, we will have to navigate all those short-term issues just as we navigated the election results. And I think broadly we still find opportunities on a bottom-up basis, that is what I would say, but sectorally those are some of the sectors that I like.
