It has really been a one-way move up since the Budget. A bit of a pause, some consolidation could be par for course. What are the pockets which are looking a little overvalued right now?
We believe there is an upside but the rally has been sharp and may be induced a bit by short covering and by continued FII inflows. In terms of spaces where valuations could be troublesome, if a case is made that FY22 numbers are going to be significantly ahead of quarter three annualised numbers, then it is okay but otherwise, next year first quarter is going to be a washout quarter in terms of base.
Most companies will deliver growth and those are the companies which can sustain valuations and probably improve on the same but others could stagnate. In consumer staples, volume growth is just about double digit and we could see some swing on margins. I would watch out for that but most parts of the market should sustain valuations and even improve going forward.
The only problem is even when companies are coming out with good results, that is not exciting stock prices. We saw it in Balkrishna Industries and even Tata Steel.
We have had a sharp rally already. People need to get to a particular price before the next one starts. Let me talk in terms of the market and what kind of an upside we see there. The result season has been good. We will end with Rs 500 EPS for Nifty. As of now, people believe it will be closer to Rs 520. So after seven years, we are breaking the Rs 400 barrier for Nifty EPS. And 2022 could be straight Rs 700 plus and 2023 – Rs 800.
Now take a discount to that multiple for index target. From where we are, we see a 12-13% kind of an upside over the next one year. That is the kind of number you see on the index. If you divide it on a per month basis, it is a percent a month kind of market move. It is not 3% a week kind of a market move so we will have to get used to a slower pace as we go forward. But in that context, we believe most of the names should sustain if not improve valuations. We do believe high liquidity, low interest rates scenarios should sustain for longer. The EPS growth that we will see over the next two years will be sharp and so while valuations on PE may correct, stocks may deliver some upside.
Do you see more action shifting to the mid tier and smaller cap companies?
Yes, we have been talking about that for some time now. Multiple things are happening for the space. We are not traditionally midcap bulls but we are positive in this space now. For one, if you look at government policy actions, a lot of it benefits the midcap space. When they improve import duty protection, it is the midcaps which benefit because they are the guys who are mostly into manufacturing.
As for the PLI schemes, every participant that we have seen till date is a midcap company. So, government policy clearly is helping. Second, globally commodity prices are up. Tata Steel and JSW may be large cap companies, but a lot of companies in steel manufacture and commodity space are midcaps and they are benefiting.
While FIIs have been pumping in money and are getting a lot of attention, funds have been losing money. Indian retail has raised a humongous amount of money over the past three months — more than Rs 2 lakh crore. Some of that may have gone to the real economy via housing and auto purchases. But a lot of it is getting reinvested back on their own into the markets. So, the retail activity or non-institutional activity in the market is very high. That again means the breadth of the market could stay good for longer.
Thirdly, the benefit of Covid is occurring to large cap IT, but also to a lot of midcap IT. China plus one sourcing strategy that the people are focussed upon these days, are benefiting a lot of chemicals, pharmaceutical companies, most of which lie in the midcap space. We are looking at a lot of tech companies getting listed. Most of them would be in the midcap space. So, this space is seeing a lot of action and we do believe the stock price buoyancy could sustain for longer.
What would be your preferred pockets within the cyclicals?
We are focussed on lenders. It is tough to be overweight in the index given the weightage in the index itself but this is the space to look at. The NPA cycle is behind us. Going forward, this is a space which will lead the profit growth. The bad part of the cycle is behind us but in many cases, valuations may still be favourable.
Within lenders, I would say NBFCs stand out. In lending, the better ones survive and the bad ones die off. The better quality NBFCs have a lot of tailwind for them. The markets have opened up. They are able to deliver better names because the cost of money for them is going down sharper than their own lending rates. They are in segments which are still growing. Banks have started to focus there but these guys are still continuing to grow. So NBFCs and NBFC like banks are the spaces that we are really focussed on in the deep cyclicals.
In the commodity space, apart from steel, would you look at cement and some of the other material providers? Is that a segment that you look at as a proxy to the growth story?
Just a line on metals. It is a very, very difficult space. The stock prices track the commodity prices only to an extent. Everybody knows that the kind of margins the business is making maynot be sustainable. Typically the price to book average is 1.1. We are there. So it is not as if they cannot trade higher but whenever they have traded higher, they have tended to come back to 1.1 and then below that. It is a very volatile, difficult to predict space. We have stayed away from it. Cement is something that we like. There are a lot of tailwinds there. The pricing discipline has definitely been demonstrated over very long periods of time and that discipline has ensured that the better players in this space are making significant amounts of money. The overall space does not make money. The weaker ones are just about keeping their heads above water but the larger, more efficient ones are able to make significant amounts of money and that is the space that has been finding representation in our portfolios.
