"Markets are neither expensive nor in value zone," Sanjay Chawla, chief investment officer - equity at Baroda BNP Paribas Mutual Fund says in an interview to Moneycontrol. He says it will surprise him if there is any meaningful correction given the tailwinds of strong economic growth, inflation within the RBI comfort corridor, and largely stable policy continuity.
Overall, the veteran investment strategist, with over 33 years of experience in fund management, equity research, and management consultancy, remains excited about the smallcap space as he believes the segment will continue to provide opportunity for wealth creation to the investors.
What is your take on equity markets and is the Red Sea development an important factor to watch?
Our observation of the bellwether indices suggests that valuations are broadly under 20x FY25 EPS. This is in line with the last 10 years' average and hence markets are neither expensive nor in the value zone. Hence, we will be surprised if we see any meaningful correction given the tailwinds of strong economic growth, inflation within the RBI comfort corridor, and largely stable policy continuity.
On the balance, we remain positive from the medium to the long term. Over the past 1 year, broad based Index has delivered 39 percent returns (Source: Bloomberg. Past performance may or may not be sustained in future). Earnings and re-rating would have probably contributed equally to the returns.
On the back of such a strong performance, doing an encore into FY25 may be a tough task and we expect markets to track the earnings growth hereon. The Red Sea development is critical, as it provides an important pathway to India’s European exports. Crude sourcing and continued disruption may lead to commodity prices spiking.
We are building in higher freight cost in our model till the Middle East issue does not settle down. We expect end users to build inventory due to longer lead time of transportation in the interim. While we do not expect economic impact of the Red Sea issue to stay for long, and it is unlikely to derail the momentum, it could however prove to be a headwind on margins for 1-2 quarters.
Which are the main focussed sectors in the hybrid and balanced advantage funds, and why?
As a mutual fund house, we have been focussing on 3Cs: Capex, Consumption (discretionary), and Capital Market and are we overweight on them across all our portfolios. We are positive on India’s capex story and believe that the capex cycle is a multi-year story. While the valuations may appear to be higher than its own history, the order books continue to be very strong providing multi-year execution visibility.
Also read: What should you do with your mid and small-cap holdings amid heightened volatility? Experts weigh in
In urban or discretionary consumption, we have seen the premiumisation continuing and demand outlook continues to be strong on the back of demographic profile. Finally, with better depth and wider market participation, the Indian capital markets have reached a size and scale which offers some very interesting plays in the entire value chain.
Do you see any bubble in the small caps and microcaps?
Overall, we remain excited about the space as we believe that the smallcap segment would continue to provide opportunity for wealth creation to the investors. However, investors should always look at this space from a longer time horizon of at least 5 years as there would be intermittent market volatility.
Also read: Keep your portfolio in green even when market turns red: Here's a blueprint from experts
Is it the time to exercise caution while investing in banks?
In the last couple of years, especially post Covid, the financial sector, including banks, has underperformed in the broader market. In recent times, the regulator seems to be attempting to temper the growth. Growth in unsecured loan, especially in smaller ticket size, has grown at a high rate. While credit growth has been about 500 bps higher than the nominal GDP growth rate, with deposit growth lagging, elevated credit-deposit ratio for the system has got the banks in the RBI radar.
However, there seems to be no signs of deterioration on asset quality and the balance sheet is clean for most of the banks. From a valuations point of view, the sector is trading at a discount to its own history. However, whenever a sector is in regulators cross hair, it will perform only when the regulatory forbearance is reduced despite good fundamentals.
Cautious view is warranted for financial institutions whose business largely comprises of low-ticket size unsecured loans as higher growth in the last two years may bring some negative surprises in this segment.
Do you think the valuations are still comfortable in oil marketing companies?
Valuations must be looked in conjugation with growth and return ratios. In the recent past, oil marketing companies (OMCs) were making very good margins on petrol and diesel based on the pump gate prices and current duty structures. The Street was modelling in some cut in pump prices for both petrol and diesel, and profit margins would be aligned to the past.
The recent price cut in petrol and diesel is likely to result in OMCs making normalised profit in coming times. This removes a major overhang during election times. The quantum is in line with our expectations and OMCs would earn reasonable profits.
We remain constructive on OMCs as they are trading at reasonable valuations. We may see deepening deregulation with daily pricing also possibly coming back, and with enough room to recover any under-recovery. This augurs well for the industry.
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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