In an interview with ETMarkets, Bharaddia has over 2 decades of successful investment experience in public and private markets, said: “The recent rise has brought Nifty’s valuations down to 20x FY23E and 17.5x FY24E, which seems reasonable given geopolitics and the global economy, the uncertainties still linger.Edited excerpts:
Where do you see interest rates heading in the short term?
The RBI made its third rate hike to take the repo rate to 5.4%; however, it sounded a little less hawkish. With the decline in commodity prices and more specifically crude, we believe that the peak of inflation may well be behind us.
CPI figures for July were 6.7%, a 5-month low. Rupee weakness could add some headwinds to RBI policy, but we believe aggressive rate hikes are behind us.
Sensex and Nifty50 are trading above key resistance levels – do you see strength in the rally?
We are in a zone where positive news on US data is viewed negatively with fears that this could lead to continued aggressive rate hikes to manage inflation.
Despite this, FIIs have become net buyers, helping markets stage a smart 14% rally in the last month or so. Domestic liquidity also continues to be elevated as we saw no declines in monthly SIP data.
With this kind of liquidity available and the sharp rise in the market, there is a growing sense of FOMO among investors, which further keeps the markets buoyant.
That said, the recent rise has brought Nifty’s valuations down to 20x FY23E and 17.5x FY24E, which seems reasonable given that global geopolitical and economic uncertainties persist.
Our feeling is that while India is structurally in a bull run given its favorable economic and demographic advantages; however, given the recent rapid rise in the market, we could see a timing correction as well as an absolute correction before we see a structural uptrend.
In our view, stellar returns will now be more specific to equities than to broader markets.
What do you think of the results for the June quarter? A new trend that you have spotted that could carry over the next few quarters in a specific industry?
This earnings season has gone better than expected, with most companies handling commodity price increases better than expected.
Despite margin pressures, higher realizations led most sectors to perform better compared to the same quarter last year.
Certain sectors such as hotels, logistics, textiles (especially clothing), infrastructure, etc. even experienced sequential growth.
We believe some margin pressure will carry over to the second quarter as well as higher cost inventory and expect we will see some normalization occurring in the second half of this year.
Despite a potential slowdown in the United States and Europe, companies in sectors such as manufacturing, engineering, capital goods, infrastructure, auto accessories, defense, etc. expect a better S2 as they seek to gain market share in exports from global competitors (China +1 impact, as well as government incentives and FTAs) as well as good domestic market opportunities.
Overall, we believe FY23 and FY24 should both see good growth as geopolitical issues ease and we see normalization return.
What is your opinion on small and mid cap stocks? They also bounced online with Sensex and Nifty. Time to buy or exit positions?
In our view, many companies in the small and mid cap sector are poised to outperform. Most of them have additional capabilities while maintaining healthy balance sheets and generating strong cash flow.
The Nifty Small Cap 100 is still 21% below its 52-week high (while the Nifty50 is only 5% lower), for individual stocks the correction has been even more severe.
Given the recent drop, many of these companies are trading at reasonable valuations. We expect the small-mid cap space to outperform the Nifty, but this performance should be more stock-specific.
We recommend investing in companies following a bottom-up rather than a top-down approach.
How do you choose stocks for your portfolio? What is the methodology you follow?
For us, investing is more about buying a business than “buying stocks”. Most of our investment ideas come from our extensive network within the industry and/or our own proprietary research.
We actively follow more than 600 companies in the micro and small cap space to keep up to date with developments in various sectors.
We seek to invest in companies that have the potential to generate an IRR above 25% over a long-term period.
To find these winners, we typically look for companies that are exploiting a large market opportunity and where high operating leverage is likely to result in either expansions and/or increased capacity utilizations.
Sound management and a strong balance sheet and cash flow are the basic ingredients of our investment philosophy.
Last but not least is buying these companies at a price below their intrinsic values. For us, the projected IRR should come from the underlying growth of the business and not from a revaluation of valuations – revaluation, if any, helps us post faster multibagger returns.
Our extensive research gives us confidence to hold our investments through various market cycles and brings us comfort even when markets are volatile.
Foreign investors have become net buyers in Indian markets across all sectors. What drives the strategy?
In our view, IFIs are playing on India’s growth story. All three, FMCG, Cyclicals and Banks are closely linked to the economic growth of the country, which should be good.
Many FMCG companies have held up well to commodity increases and are poised to perform well as prices normalize. Demand also appears favorable.
Banks are in a good position to take advantage of RBI rate hikes in the near term, as deposit rates will rise with a lag, but the loan market is already seeing rate hikes.
In the IT space, it looks like much of the growth is behind us amid the global slowdown and macroeconomic issues. Metal prices should also remain volatile in the short term.
DII’s stake in Nifty-500 at multi-quarter high, according to brokerage report. Does this mean that in the future, DIIs will be dominant players in Indian markets as the FII-DII ownership ratio shrinks?
We are witnessing a change in mentality of investors in India. Growth in demat accounts for FY22 compared to FY21 was 63%.
If we look at the SIP figures, the assets under management of funds linked to systematic investment plans reached new highs at INR 6.1 lac crs.
The education provided by AMFI and the lack of different avenues of wealth creation seem to have tapped into the large Indian market.
DIIs have become dominant players in the Indian markets and will continue to be so as SIP entries continue to be strong.
That said, FIIs will also continue to be important to Indian markets as global investors seek to be part of India’s growth story. Overall, with DIIs and FIIs bullish on India, this is good news for Indian markets!
Nifty’s 12-month P/E came in at 22.2x, 11% above its LPA – a sign of caution or an attractive level to buy?
As mentioned earlier, from a long-term perspective, we strongly believe that India is in a structural bull run. However, the recent rapid and sharp rise in indices has indeed pushed valuations to slightly elevated levels.
Our feeling is that we may see a timing correction and/or an absolute correction before going back structurally.
Despite this, there are enough opportunities in the market in sectors such as manufacturing, engineering, automotive accessories, infrastructure, etc., which are still trading at reasonable valuations, strong balance sheets and a trajectory of growth. high growth.
We believe that, from a long-term investor’s perspective, it is this type of fundamental opportunity that should be sought for significant value creation rather than being drifted by major indices/valuations.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)