Keep your powder dry; buying at the right price is key to investing: Ajay Srivastava of Dimensions Corporate Finance

Indian markets at record highs; Time to exercise caution?

Indian stock markets recently achieved a new milestone, with the NSE Nifty reaching a record high of 19,500. The market’s upward momentum has primarily been driven by P/E expansion and significant foreign institutional investor (FII) buying, rather than robust earnings growth. Consequently, the question arises as to when the underlying fundamentals will align with the market’s exuberance. Investing at these levels may not offer an optimal risk-adjusted return, given the inflated valuations and uncertainty surrounding future earnings. As a result, some experts say it would be advisable to approach the current market conditions with caution, preserve resources, and await a more favourable opportunity to enter the market.

Ajay Srivastava of Dimensions Corporate Finance swears by legendary investor Warren Buffett’s ’Never lose money rule’, and says one must avoid losses more than go for returns.

Edited excerpts from an interview:

The Nifty has hit a new high of 19,500. How should investors approach the market now — wait for another 400-500 point fall on the Nifty to get in? Or would you say this is the time to actually go all in?
This rally has been all about P/E expansion. It’s not been about earnings. Nobody is expecting earnings to go up in this country. It’s all about P/E expansion, it’s all about FII buying. The question is, when you buy at these prices, would you get an adequate risk adjusted return on your capital? The answer, perhaps, may be ’no’ at this point of time, in terms of the fundamentals.

I would say if you are a risk adjusted return basis investor, why would you want to put your money at risk at these levels? Yes, there is momentum, yes there is FII buying, but would you be the lucky one to buy into a P/E expansion of this magnitude? Some Indian stocks have got P/Es of 100, 80, 70... you just name it, it’s all over the place. I would simply say, wait and keep your powder dry, there will be time to buy. And that would really be a good time to buy and make returns. Would you make a 20 percent return in the market at these levels? I have my doubts. So, don’t do what you would do today in a hurry. Relax, if you’re already invested, enjoy the ride and see where you can book your profit. But at this point of time I would certainly not recommend a big commitment.

IT heavyweights kick off the earnings season this week. There are no great expectations from largecap IT companies amid the slowdown in discretionary spending by clients. Do you think much of it is already priced in? Would you say this is the right time to actually buy IT stocks and wait for things to pick up?
See, I don’t know if the second half will be good or bad, because that’s not the news we’re getting from any of the IT companies at this point. They’re saying the deal flow is even, if not great. There is no customer loss, there is no attrition thus far. But I think adding customers is a bit of a problem today. So, growth is a problem.

Yes, customer losses are being stemmed and projects are being extended. It is one sector where every time there’s a big correction, we recommend our investors keep buying into it. You never know what’s a market bottom — these companies are good companies. These companies are strong cash-flow driven companies.

They have got global monopolies. There are very few Indian companies who are number three or number four globally. You can’t run away from the fact that IT is required. Yes, AI will come in, yes there’ll be a lot of dislocation, but the key factor is the biggest raw material for these big companies is people cost. I think that is where the control has come in.

You may find that the volume expansion may be restricted in this company for the next one year, but EBIT margin expansion is going to come through for this company. Unlike the rest of the Indian basket, where we are going to see a margin contraction in all consumer companies, you might even see de-growth (contraction) in India. But in IT companies, you might see the reverse.. that volume may be a little bit sluggish, but margins are higher because now they have got real control over the people cost.

So, people costs, which were going haywire over two years, have now come under control. Attrition is down, people are moving less in IT companies. So, one would tend to believe a wager on … EBIT expansion (being) faster than a volume expansion.

Tata Motors has turned the corner given the fact that the recent JLR sales data were pretty encouraging. Analysts believe that good times are ahead for the automaker. In fact, it may be on track to turn net zero debt this fiscal year itself. What’s your view? How does it stack up versus the likes of Maruti or M&M?
Tata Motors should never be viewed as a domestic stock at the end of the day. It’s a global stock. So, one would not tend to make them as a peer to Maruti or a Mahindra, etc. To an extent, their domestic sales are pretty good and they have been around in the market. But let’s examine what’s happening globally. Globally, the product line, more than anything, is very strong at this point. Their cars are strong, Land Rover is doing well, the Defender is also very strong. I think that’s where the traction is because there’s a premium on their products in the market.

The SUVs and the upper-end SUVs have a very good run for the time being, because the products are doing well in the market. I would not equate them with the domestic Indian market, which is sluggish, to say the least. Certain models are flying off. (Mahindra) Thar had a booking of two-three lakh and then it disappeared and then discounts appeared on some models. So, I am not too sanguine on what’s happening inside the Indian domestic market, because a lot is said about long waiting queues. But six months down the line, you see the queues have disappeared.

Tata Motors is a global story of a global brand. And that is where the traction would come from. Indian stories, I think, would see muted demand. Stocks are expensive at this point. Whether you talk to the biggest one with tractors or with autos, I think they are overcooked as a story for the time being. Sure, you can buy, sure the prices can go up… nobody argues with the market. But I doubt whether the fundamentals would go with it, given what’s happened to the economy today. The flood situation, the demand, the dislocation, the inflation, all put together, I don’t see demand in the market.

I’ve travelled a lot in the last 30 days globally. Domestically, there is no demand in the system for consumer products. I would be keeping out of these companies in domestic stories for the time being because demand is poor. Tata Motors is a global story. So, evaluate it from a global perspective of a top-quality brand. I think those SUVs are really doing wonders in the global markets.

Also Read: Promising outlook for Indian markets, focus on quality stocks, says Sharekhan's Gaurav Dua

Would you say that manufacturing is one pocket that would emerge as the next big thing, given the fact that there is a capex push by the government as we enter into an election year. Some big-ticket deals have been inked in the defence space as well. So, would you look at some of these manufacturing names now emerging as a big theme?

You just saw the IPOs recently and you saw the valuation of the companies post the IPO. I think in a state of inebriated exuberance, one would not even buy at that price. But people are buying and people are investing at those prices, one can’t argue with that.

If you look at the valuation of defence companies, which are primarily PSU firms ... it’s incredible. You can keep buying it, you can keep holding it. But is this valuation justified? So, I don’t think there is a story out there in manufacturing, because what are the valuations at which you are investing in these companies.

If you look at speciality companies, chemical companies, valuations were astronomical, and you saw the correction that happened there. You’ve also seen how the multiplex story has unfolded. The valuation became incredibly crazy. And today, if you had bought PVR, Inox at 1,800, 1,900 or 2,000, you’d be ruing the fact that the market is at a new high and how this particular story is playing out.

So, the question is not about whether the sector will do well or not; the question is are you buying at the right price in this market? Is this pricing fundamentally good vis-a-vis what is expected out of these industries? Certainly manufacturing cannot do much better than it is doing today. Because India is going to grow 6.5–7 percent at best.

The infrastructure story is good, no doubt. But the fact is that money is being spent on things like roads in places where the traffic density is almost zero. The infrastructure multiplier will come only if it is spent in the right place. In our view, yes, it’s a good story but the constraint is in urban infrastructure.

So, my personal view is at 6.5% economic growth, and at this valuation of manufacturing companies, I do not see a connect to buy at this juncture. If they are much cheaper, then perhaps yes, but not at this juncture. I would wait it out. Yes, there could be an increase in share price. But as Warren Buffett says, avoid losses more than go for returns.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.​​​​​​​​​​​​​​​​​​​​​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.​​​​​​​​​​​​​​​​​​​​​