The present valuation in pharma and healthcare is far below their historical highs and there's enough steam left in the pharma and healthcare segment yet and holding this sector in any segment, whether it is hospitals, APIs or pharma exporters, should deliver in double digits, says Akhil Bhardwaj, Senior Partner at Alpha Capital.
With more than 14 years of experience in private wealth management, Bhardwaj shares in an interview with Moneycontrol that valuations in large-caps is slightly expensive but not in the bubble zone.
"PE expansion in largecap is yet to happen and a lot of money is sitting idle and waiting for a good opportunity to enter. Once the global sentiments improve and inflation eases down then we can see good amount of corpus from FIIs," he says. Excerpts from the interview:
Do you see earnings upgrades in the infra and engineering, given the order pipeline?
We don't see too much earnings upgrade happening. If you look at last two years, infrastructure had reported very good earnings due to low inflation, lower cost of raw materials, lower cost of capital and government push on infrastructure projects.
Government continues to be driver of capex expansion and private capex is yet to pickup. If the private capex starts picking up then we might see some jump. These were some positive sides but there are some downside as well.
Today we are in an environment where as inflation is sticky, majority of the central banks have tightened the monetary policy and the cost of capital has gone up. There is global uncertainty led by geo-political tensions, risk of slowdown in major advanced economies could hamper the investments activities. We also have general elections next year which could result in a slowdown in capital expenditure and push in social spendings.
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Do you think the valuations in largecaps are not in a bubble zone?
Valuations in largecap is slightly expensive but not in bubble zone. If you look at trailing PE of Nifty50 then it is somewhere around the long-term average , even forward PE is not too much expensive. The mere reason for it is due to that fact that last two years largecap companies have been reporting very good profits.
If you look at banks and financial institutions (which constitutes around 35-40 percent of Nifty50) have reported very good profits in last 2 years due to improvements in the net interest rate margin, reduction in NPA, good offtake of credit cycle. NPAs of Banks & financial are at decade low.
PE expansion in largecap is yet to happen and a lot of money is sitting idle and waiting for a good opportunity to enter. Once the global sentiments improve and inflation eases down then we can see good amount of corpus from FIIs.
Is it still the right time to start putting money into the midcaps and small caps, as the indices traded at record highs with massive returns this year?
Midcaps and smallcaps are enjoying a good phase and they have generated very good returns from last five month. They have also attracted huge inflow in the recent past. The surprising fact is that where midcap and smallcap inflows have jumped up, some categories like largecaps, flexi funds and ELSS witnessed net outflows. Will the rally continue? It is slightly difficult to say but if the time horizon of the investment is longer say 5-10 years, then you can start deploying some corpus in gradual manner if you don't have any allocation to it.
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In the long run you will definitely make good money. The biggest benefit of having some allocation is that you get exposure to diversified sectors which are not present in largecap space. But they are also slightly volatile when compared to largecap so if you understand the risk associated with it then you should definitely invest otherwise don't invest. The rally is happing from past few months and we are yet to see consolidation in it.
Are the valuations reasonable in banking and insurance segment?
As I said, valuations of banking and insurance segments are in a reasonable zone because banks have cleaned up there balance sheets with reduction in NPA and improving net interest arbitrage. They are traded at the average valuation through past many years unlike other sectors which are trading at a premium.
We observe that credit growth was held for quite some time and so it is also a lucrative sector to play the capex growth cycle. All fund houses remain overboard into banking & insurance sector, which must benefit under capex growth cycle.
The only concern is that in case repricing of loan happen then it may impact the profitability of banks but incase reduction in interest rate is compensated by higher business growth & increase in loan book, then banks would continue to grow at good pace. The credit growth market is expected to rise due to good investment climate.
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Is the healthcare space in a comfort zone for investment?
The pharma and healthcare sector had a strong rally in the last one year. The category has given around 18 percent return in this period. Since this sector has been a consistent underperformer as compared to broader market, this rally is seen as a catch-up rally. Yesterday, underperformer would be winner of future. Therefore, we do not see this sector to be in a heated zone and a cause for concern.
In fact the present valuation is still below their historical highs. There is still steam left in pharma and healthcare sector and holding this sector in any segment, whether it is hospitals, API’s or pharma companies exporting should deliver at least double-digit return in future. Investor should not have concentration risk in pharma & health care and sector diversification must be attained.
Do you expect the domestic flows to remain strong in equities?
Due to strong domestic inflows, our Indian stock market has remained resilient in the past. During the continuous spike in the interest rate in USA, around $30 billion of FII money from India has flown to USA and similarly from other emerging countries. All economies have corrected substantially due to this exodus but India has remained resilient because of strong domestic flows.
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The strong domestic flows are contributed via SIP of around Rs 15,000 crore per month, NPS, EPF allocation in Nifty 50 and ad hoc investment by investor. Beside this, increased awareness about investing in stock market has surge up the list of investor. The old belief of keeping money in real estate & gold has faded away.
We expect these flows to remain strong in coming future because underlying economy is doing reasonably Okay. And because of these strong inflows, it does not appear that there would be significant market correction.
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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