"The two largest sectors – financial services and IT, are expected to see strong earnings expansion, which will determine the market performance in the near to mid-term," Ashwini Shami, Executive Vice President, Portfolio Manager and co-founder of OmniScience Capital says in an interview to Moneycontrol. These two sectors account for nearly 50 percent of the index weight (Nifty 50).
After severe correction in the cigarette major, "compared to the broader FMCG sector, there is valuation comfort on ITC, and one can see it as a good dividend yield stock," he says, adding the company has a diversified pool of core businesses and strong predictability on cash flows.
After the consecration ceremony of Ram Mandir, Ashwini with more than 2 decades of experience in the financial services industry sees economic activities around Ayodhya catalyzing strong growth for the UP economy, which has already seen a growth of nearly 20 percent last year, significantly higher than the national GDP growth.
Do you expect the liquidity-driven momentum to continue in the market until the general elections? If yes, will the Nifty add another 10 percent rally in the coming months?
We believe that one of the biggest factors determining the future course of action for the market is the current valuation. The Nifty 50 index currently trades at a price-to-earnings multiple of 22.8, and if one normalizes the earnings, the forward multiple is lower than 20.
The two largest sectors – financial services and IT, accounting for nearly 50 percent of the index weight, are expected to see strong earnings expansion, which will determine the market performance in the near to mid-term.
Do you see more value in PSUs if the government continues focusing on value appreciation in the space?
We clearly see more value in PSU stocks. The government is focusing on growth investments, as indicated by the budget allocation of more than Rs 15 lakh crore to capital investments. Sectors such as defence, power, railways, and urban development will continue to see growing order books.
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Public sector banks are also on a stronger footing with higher capital adequacy ratios, lower NPAs, and a strong demand outlook. While some companies in this pack have moved closer to their intrinsic value, a large number of PSU stocks, especially in the power, banking, and railway sectors, continue to trade at a discount to their intrinsic value despite some good price appreciation in the recent past.
The FMCG sector has been under pressure due to a few large caps. Is it more of a stock-specific issue or sector-specific concern?
FMCG is under pressure due to expensive valuations and lower-than-expected growth numbers. The current price-to-earnings multiple for the Nifty FMCG index is 42.7 compared to 24.4 for the broader market index - Nifty 500.
The FMCG index is at a significant premium where the largest stock by weightage of more than 30 percent in the index has a PE multiple of 24.6. This implies that the rest of the names are trading at even higher premiums. As earning growth has not kept pace with expectations, the FMCG pack has underperformed YTD compared to the broader market.
What is your take on ITC in general?
Compared to the broader FMCG sector, there is valuation comfort on ITC, and one can see it as a good dividend yield stock. It has a diversified pool of core businesses and strong predictability on cash flows. It offers a dividend yield of 3-4 percent and a steady growth outlook. This is not a stock recommendation, and any allocation should ideally be made through a diversified portfolio approach.
Do you really think investment in diverse sectors aligned with the growth of Ayodhya is a great opportunity now?
We see economic activities around Ayodhya catalyzing strong growth for the UP economy, which has already seen a growth of nearly 20 percent last year, significantly higher than the national GDP growth. As Uttar Pradesh (UP) is targeting to be a $1 trillion economy, investments in Ayodhya, to support the expected big influx of visitors, shall prove to be a catalyst for growth.
While the typical investment approach would be to invest in the food, hotel, airline, and ticketing stocks which are expected to benefit from higher footfalls, one has to keep the focus on valuations of these popular names.
A prudent strategy would be to look at the second order and third order impact from the Ayodhya business ecosystem and build an allocation to fundamentally strong companies available at reasonable valuations.
One part of the allocation should go to the infrastructure enabler companies such as companies in logistics, utilities, urban development space and the other allocation can go to companies that will enable consumption such as financial services and other consumer and business services companies.
Is China bottoming out now?
There are fundamental challenges with the Chinese economy. Firstly, the global supply chain ecosystem is shifting away from China, and secondly, the high leveraged growth that China has adopted may create trouble for the economy for many years.
Global investors may allocate a larger part of their emerging market allocation to India, which may create further liquidity issues for the Chinese markets.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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