Daily Voice: Don't foresee any significant new risk factors for market, add exposure to these 6 sectors in correction, says OmniScience's Vikas Gupta

At this point, most major uncertainty-inducing events are behind us. While speculating on potential market downturns is always an option, as Scientific Investors, we focus on actionable insights rather than merely analyzing Mr. Market’s behaviour. Instead, we seek to capitalize on market opportunities.

The critical question remains: Is this the right time to buy or sell? In our view, the current market presents an attractive opportunity. The Nifty’s current PE ratio stands at approximately 20.5x, which is close to its lowest levels in the last 5-10 years, except for the COVID-induced bottom at 18.71x. Prior to this, during 2012-2014, when India was part of the Fragile Five, experiencing double-digit inflation and a 25% currency depreciation, the Nifty PE hovered between 17x and 19x. At that time, both bank and corporate balance sheets were heavily strained, and an impending NPA cycle loomed.

The present scenario is starkly different. India is projected to have the highest GDP growth rate among major economies, inflation is near the RBI’s target of 4%, and the country boasts one of the strongest economic fundamentals globally. Bank NPAs are at two-decade lows, with robust NIM spreads and record-high ROEs. Corporate balance sheets are significantly cleaner, with substantial untapped borrowing capacity to fuel growth.

An active portfolio strategy can identify numerous attractive investment opportunities across sectors. However, market favourites from the last 5-10 years are overvalued and could face corrections.

Have you observed any risks to your portfolios due to the recent correction that began in October of last year?

We do not perceive any new fundamental risks to our portfolio companies. On the contrary, their balance sheets have strengthened further, and the recent correction has rendered our portfolio even more attractively valued. Our highest-allocated sector comprises companies consistently reporting double-digit revenue growth and high-teen profit growth. Currently, our flexicap portfolio has a PE of around 12, making the risk-reward ratio highly favourable for long-term investors (3-5 years).

Do you believe the risk posed by Trump’s tariffs has gradually diminished?

Trump’s reciprocal tariffs affect all countries, including India. However, India and the US are likely to negotiate sector-specific agreements. These deals will involve India lowering tariffs selectively while ensuring minimal disruption to domestic industries, allowing US companies greater access to Indian markets.

The broad framework of these agreements is now relatively clear. Notably, Indian companies stand to gain significantly in sectors such as energy, power, defense, strategic minerals (including rare earths), pharmaceuticals, API, and biotech. Additionally, industries such as drones, autonomous systems, data centers, AI, and space-related technologies are poised for substantial opportunities through joint ventures, FDI inflows, and expanded trade with the US.

What are the other major risk factors that could further dampen sentiment on Dalal Street?

At present, we do not foresee any significant new risk factors; however, sentiment remains subdued. A primary concern is the potential exit of first-time domestic investors who entered the markets over the last 4-5 years. Many may lack the experience or risk tolerance to endure portfolio drawdowns exceeding 20%, leading to a wave of exits and further downside pressure. This trend is already visible in the rising SIP stoppage rates in mutual funds.

As Warren Buffett aptly puts it: “The stock market is a device for transferring money from the impatient to the patient.”

Have you made any major purchases during the recent correction? Could you explain your reasoning?

We have focused on acquiring banks with the lowest NPAs, highest NIMs and ROEs, and the largest unutilized lending capacities in the last two decades. These banks exhibit strong double-digit growth rates and are trading at significant discounts to their intrinsic values, with an expected surge in lending demand over the next 3-5 years.

Additionally, we have invested in companies within the power sector, housing finance, logistics, construction, and engineering while exiting the IT sector due to valuation concerns.

Do you foresee corporate earnings growth remaining at risk in Q4FY25? When do you anticipate a strong earnings recovery?

Q4FY25 is expected to remain muted. However, we anticipate a strong earnings recovery starting from H2FY26, possibly as early as Q2FY26. Despite an eventual earnings recovery, certain sectors—especially those that remain overvalued despite recent corrections—may struggle to see proportional stock price appreciation.

Conversely, significantly undervalued sectors poised for earnings growth could witness substantial stock price appreciation, presenting compelling investment opportunities.

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