Invest in IT stocks if you are willing to look past near-term headwinds: Trideep Bhattacharya of Edelweiss AMC

Indian market valuations getting stretched?

Indian markets may have toppled record highs but compared to the last 12-15 months, markets have barely gone anywhere, says Trideep Bhattacharya, Chief Investment Officer – Equities, Edelweiss AMC. However, he points out that earnings estimates of companies have ticked up by at least about 15-30 percent over the same period. Therefore, according to him, the valuations are a lot more palatable now than they were about a year ago.

IT and defence are some of the pockets where he sees value. However, he advises investing in pockets that have earnings resilience, where there is a fair bit of visibility on growth and prospects of upward revision in earnings. These are the themes where, he reckons, valuations would hold up despite the market movement. Here are the edited excerpts of his interview with Moneycontrol.

Well, I think we are clearly in a medium-term uptrend, and from a near-term perspective forecasting anything would be a bit of a guess. But we are heading into the results season, and a lot of prima facie data will come out over the course of the month whether it’s the loan growth numbers from banks or commentary from companies. But I think in the face of macro weakness, the relative earnings resilience of Indian markets is worth noting and which is what is being celebrated, the generic strength of Indian equity markets which is not only expected over the near term but will be there over the medium term as well.

Well, this is symptomatic of the risk appetite in the markets. As I said, the relative earnings resilience is being celebrated by the markets, a fact that’s supported by the higher interest in mid and small caps. That's the first point to note. Whenever the flows come, it creates some sort of excesses at some point. While we are in a medium term, bull market and things remain particularly positive in pockets, valuations are moving on the higher side. But there are still many pockets of value, which are worth playing around with. So, I wouldn't try to hazard a big portion on mid and small caps. But yes, in some pockets the stock price movements have been a little more exuberant than expected.

Of the three that you mentioned, I would probably point towards IT. But having said that, we also caution that the demand momentum in the very near term, which is the June quarter or September quarter numbers, might remain a little tepid. And for a better part of FY24, which is the current fiscal year, might remain a little sluggish. So if investors are willing to look past the near-term weakness and play for the long haul, then certainly, of the three that you mentioned, IT appears, on a relative basis, more as a pocket of value. From a long-term standpoint, I would be particularly bullish on defence. Overall, this is a 10-year opportunity where the demand far outstrips supply. And this will probably become a big sector from an Indian market standpoint. But, you know valuations appear higher in the near term. It's more of a growth area than value. That's how I would qualify it.

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While I can't get stock specific here, I can tell you that the opportunity is big but the supply is limited in terms of companies that can fulfil the demand, which is being asked for by the government of India in the form of indigenisation of defence. You will see multiple types of companies entering this area, then picking the areas of expertise and trying to get as much mileage as possible. So I think you will see an expansion in the companies getting into defence. If the recent data is anything to go by, it shows that this is just about the start, you will see this trend intensify, particularly once the elections are out of the way.

Broadly speaking, the markets haven't gone anywhere over the last 12- 15 months. However, the earnings estimates of companies have ticked up by at least about 15-30 percent, depending on the growth rates of the companies. Valuations today are a lot more palatable than what they were about a year or so ago. But we have seen a bit of buoyancy in the markets on a daily basis. So on the back of a buoyant market, how do we pick stocks? Our stock selection framework revolves around earnings resilience. We look for pockets of earnings resilience where we see visibility on growth and earnings revisions on the upside. On a relative as well as on an absolute basis, these are the pockets I would reckon, where valuations would hold up in case the markets fall or do well.