We approach investing like farming, harvesting different crops in different seasons and not all at one go: Enam’s Manish Chokhani

Indian retail investors have significantly bolstered market resilience. Approximately 85% of India’s $5.5 trillion market cap is now domestically held, alongside an accumulated wealth of $5–6 trillion in real estate, $2 trillion in gold, and $4–4.5 trillion in stocks. Banking assets stand at around $3 trillion. So, if you put this together, the average Indian has become wealthier. The wealth creation has been unprecedented and that can power economic growth.

Will this liquidity continue to drive the markets?

The index has tripled from its low of 7,000 to about 25,000 in four years. Historically, earnings growth in India allows you to double every five years or 4x in a decade; this time, we are already at 3.5x in four years, albeit from a low base. Therefore, there’s not much juice in the market to more than double by 2030. While doubling again in the next five years may not feel as exciting as the previous years, but when you pay 100-150x for multiple companies, the returns may not come for a long period of time.

Do you see multiples as high evenly across the board?

Of the NSE 500, which is approximately valued at $5 trillion, eleven companies make 11 percent of that or $1.2 trillion and the average value of a company in this segment is over a $100 billion. Obviously, it's that much harder to create compounding on that base… like the ROI for Reliance is now single digits. To expect the stock to be delivering performance much more than its ROI for a long period of time is difficult. The next quartile or the next 30 companies that make up approximately $1.2 trillion has companies valued at around $40 billion. In this, enough wealth has been created. Quartile three is about another 80 odd companies that add up to $1.2 trillion and is valued at $14 billion each. But the tail, which is 370 companies, that's the $3 billion to $4 billion market cap or Rs 25,000 crores, that’s where the whole action has centered around and that’s where the excesses have also happened because, in this euphoric rise, people have been chasing momentum of earnings now and forgetting that there is a price to pay for everything. You can have the best company in the world but, if you pay the wrong price, you spend decades correcting for it. In the 90s, there was Hindustan Lever. In 1998, it was at Rs 3,000 levels and the next 12 years it spent recovering that same. In the same way, in Infosys, our favourite company and one in which many of us made our fortunes, was at $45 billion market cap in March 2000 and today it’s at around $90 billion market cap. This means that its market cap has gone up 4x in rupee terms while, over this period, the index has gone up 14x.

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The laggards of the 2008 global financial crisis were the leaders of this bull market. Real estate, infrastructure, power, capital goods… these segments didn't do anything for the last decade, but they've come roaring back in the last four years. By the same token, the leaders of the last bull market of 2000 to 2020, which was HDFC Bank, Kotak Bank, Bajaj Finance, Nestle, Page Industries, they've not delivered returns commensurate to what the market has done now. So, it’s a cycle that plays out.

Therefore, you play these ebbs and flows, and that's really the only way to be placed in this market.

What about the value trades since 2020?

I don’t think they were value trades. They all had a catalyst, in a sense. It was clear, even before Covid, that certain themes would play out in India. One is of consumption, or consumer discretionary in particular, with people wanting better homes or better cars, wanting to go on holidays, wanting faster delivery, wanting convenience. Second is the rise of value retail. Third, we thought, would be privatisation beneficiaries and the rise of Adani played straight into that theme. Fourth was financialisation; the average age of an investor today is 32 years old and they haven’t seen a bear market in their life and that has worked out well (to develop the capital markets). Then there were three or four things that the government did, to provide stimulus—the production-linked incentive scheme (PLIS); then the spend on infrastructure, which also gave rise to the manufacturing theme; then the signing of the free-trade agreements (FTAs) to get the export engine firing, which hasn’t unfortunately fired till now; and then there was the energy-transition theme that is still playing out. So, there were enough (investing) themes to go after this whole period (post 2020).

In these themes, some valuations have been stretched to the hilt. Therefore the companies may perform but the stocks may not. Some there are still opportunities.

Where are the valuations stretched?

While sectors such as real estate and capital goods are strong, some stocks are priced high, suggesting potential overvaluation. On consumer-discretionary side, whether it is retail or these Zomatos of the world, they are all fantastic companies, but I think investors are paying a very, very high price for just the sheer momentum. As (the Swiss investor) Mark Faber used to famously say this about Nokia, in the 2000s, that it's a consumer durable with a high growth rate. When the growth rate slows, it'll come back to consumer durable kind of pricing. That is what, I suspect, will happen to a lot of these high-flying stocks.

What’s your take on PSUs?

PSUs is not one basket. There are capex-heavy PSUs, the energy ones haven't done well, and the metals are still getting up to go. The PSU banks have only compounded at rate of earnings, they are still at book value. They (PSU banks) are still making their 15-20% ROE (return on equity) and they are still trading at 5x. So, there is value there. It (PSU banks) has been such a hated space, with people talking about them misallocating capital, predicting that they (the banks) will blow up and so forth… hopefully faith of investors in this segment will be restored, like it was in capital goods and real estate. I do have a couple of holdings in PSU banks.

What about private banks?

You had the so-called quality banks such as HDFC and Kotak and they didn’t participate (in the rally), the performance then shifted (to other banks) because the rate of change in the banks such as ICICI Bank and Axis Bank was much greater, they have caught up but they are still (valued) at earnings. ICICI Bank has re-rated but Axis Bank has still not been re-rated.

There was euphoria among the public for smaller banks such as YES Bank and they were ignoring the other names because it (YES Bank) was trading at a low ticket size of 20x. But the investors forgot that its equity base has expanded dramatically. It has nearly 60 lakh shareholders. So, it’s not like investors don’t like banks, it’s just that they want to buy a bank which can jump (appreciate) faster. It doesn’t happen in real-life.

I'm not sure everyone knows what they're doing and buying there (in high equity-base companies). But I mean, if they are (sure), good luck to them. Of course, some of these have done well also for them. But, clearly, the vision of the investor there is greater than that of the promoter.

There is a theory that small businesses were displaced after the rollout of Goods and Services Tax (GST) and a lot of that money came into the stock market and provided liquidity since 2016. Do you think this has happened and, if yes, has this played out? Or are the salaried really driving the liquidity with their SIP contributions? Is there a liquidity risk?

I do not know if the smaller businesses did do this (of putting their money into stock markets after their businesses were shuttered) but the reality is that there has been a asset-allocation shift in India. For years, Indians have been saving a trillion dollars a year, half of this still goes into hard assets such as real estate and gold. We are still saving $70-100 billion in gold every year. The stock markets are getting $50 billion a year, so not all the money is coming into stock markets.

So, to get to this $4 trillion wealth creation in the stock market is something which is unparalleled, and it is not a trend that will reverse easily, even if we have a 2008 event. If we can keep compounding earnings at 13 percent and see nominal GDP growth rate at 11 percent, despite setbacks and time corrections, it’s not that the story is to be juiced today and forgotten forever.

I am certainly concerned that valuations are ahead of reality, so if we have a consolidation period of a year to digest this and let earnings catch up, and we do certain things (through policy making), the odds are that you will still compound at double digits.

Could we see a correction over 10%, despite strong domestic liquidity?

It’s possible, though foreign inflows have been lower than expected. Domestic support is strong from institutions like EPFO and LIC, but historical trends show foreign flows have been key drivers of sustained growth. While India’s capex continues with investments in data centers and power plants, I hope external factors do not drive a sharp correction.

Will foreign inflows increase?

Ideally, yes. However, aside from tech giants like Amazon and Google, many Western industries aren’t expanding, and India’s limited FTAs constrain export potential. The largest FDI investor in the world now is China and we are not the best friends with them. Until that relationship is sorted, it may not be possible for hundreds of billions of FDI coming in. I am also underwhelmed that we haven't managed to sign the breakthrough FTA. We can keep dropping the rupee to 85, 90 or 100 but if you don't have that advantage which other countries such as Vietnam, Bangladesh have with the FTAs, and you're not part of global supply chain, just being cheap is not going to help you to get your export market share up.

What about FPI flows?

There are various reasons but the number one reason is that, when you are making so much money in your home market by doing nothing, you don’t have to explore other markets. you You make more money on Nvidia in a week than you would do in the whole year in India. The second reason is that we were not really part of the global indices and emerging markets as a category died because of the blow up of Russia and China. People don’t have India specific funds, so unless you come into global indices, we will still be at 3-4 percent. So, at 3-4 percent, it’s not like the fund manager will lose his job if he isn’t in India. That said, our share of the world market cap will go up, US cannot remain at 60-62 percent. Some of these corrections are yet to happen, and a wall of money will head our way. But it may surprise us that the money may head into other EM markets and not just to India, so we need to rise as a class together. Also G7 currency concerns (debasing of the currency) could shift focus to hard assets like precious metals.

What might trigger a shift in foreign flows to India?

Instability in developed markets, like a potential bond market failure in the U.K., could trigger a shift. Japan’s central bank ownership of its stock market and near-zero interest rates are also factors. I was expecting the Japanese to put a trillion dollars in India, which should come. But definitely expecting a debt market event that could prompt foreign investors to look more favourably toward India.

Is the earnings resurgence in small and mid-caps sustainable? There was a narrative that the strong growth in this segment came from earnings growth that came following GST rollout and the shift from unorganised to organised. Is there a contraction in sight? What needs to be done to keep the momentum going?

Earnings growth is decelerating, though “contraction” isn’t the right term. While GST collections trail GDP growth, corporate and income taxes remain robust. GST has grown at about 6-6.5 percent, which is a mystery to be because 70percent of India GDP is taxed on GST. If you take 70% and you take a median (GST) rate as say 15 percent, GST collection ought to be 10-11 percent of GDP. We are closer to 5 than to 10. So is that evasion happening (that needs to be curbed), or do we still need to expand the tax base, it is not clear. It is from GST collections that the government gets the ammunition to spend more. Future growth depends on second-generation structural reforms such as privatization and labour reform. To boost the exports, free-trade agreements have to be in place and renewable energy investments need to be made.

Why hasn’t disinvestment progressed despite favourable market conditions?

Privatisation remains disappointing, missing a valuable opportunity for growth-driven investment. Post-COVID, fiscal policy could have favoured infrastructure without deficit scrutiny, but the focus has shifted toward welfare. This (shift to welfare spending) is going to deliver a shock to the system and the only way to counter it is through privatisation. (After failure of privatisation) the second big disappointment has been in the addressing of India’s energy needs (through building nuclear plants, solar power expansion and drilling for oil). Then we need to secure FTAs, swap agreements with countries instead of building this stupidity called reserves, where a poor country like India is lending money back to Americans and Europeans to make 2 percent returns on a currency that can be easily printed (and replaced). Our entire reserves can be printed by America in six months.

What is your outlook on small-cap and mid-cap earnings growth?

Long-term earnings for small- and mid-caps could average 13–15% annually, potentially doubling every five years. While short-term corrections in valuations are expected, a widespread earnings contraction seems unlikely. Real wealth creation is often in larger companies. But today these companies are in a cyclical where you're making 50-60 percent compounded return for a year or two and then you fall back. That doesn't mean it's earning contraction for the market.

How do you view the SME exchange?

The SME exchange is the biggest gambling den in town. It has become speculative with limited regulation, and some listed companies may not be investment-grade. Improved regulatory oversight from SEBI could stabilise this sector, supporting long-term SME growth. But SEBI may not have the capacity to oversee this. I don’t have an answer for this (on how best to regulate this) but maybe they (the enterprises) have to just bide their time and go through private equity.

Are you currently buying or selling?

Our approach is long-term, like “farming”—some crops can be harvested in this season and the others can be harvested in the next. You don’t harvest the whole lot in one go. There are always opportunities in the market, we typically tend to sell before they get very overpriced and we buy what is boring a couple of years ahead of the market and wait. I am happy if it (the stock) does not move for a year, I don’t like paying short-term capital gains tax.

What’s your Nifty prediction for next Diwali?

If we’re up double digits, that’s satisfactory. The market’s ahead of reality in valuation, so I’d prefer it consolidates to avoid selling off high-performing stocks prematurely, allowing for longer compounding.

What’s the worst-case scenario?

A 2008-like debt crisis remains a risk, possibly unfolding over a few years. Another potential scenario could involve a U.S. policy shift under Donald Trump, with tariffs driving inflation and higher interest rates. The advantage of market liquidity is flexibility—I can shift positions if necessary, unlike private equity, which locks capital long-term.

What are the top risks?

Key risks include global debt, geopolitical tensions, polarized domestic politics, climate change, and tech disruption. Rising debt-to-GDP ratios are concerning in developed economies, while U.S.-China tensions add global uncertainty. Polarized politics can lead to instability, as seen in recent societal shifts. Climate risks, exemplified by the Bangalore floods, can disrupt infrastructure. Meanwhile, advancements in AI, biotech, and robotics will redefine sectors like IT and pharma, where India must keep pace to stay competitive.

Which sectors or themes do you find most attractive for future growth?

Energy transition, financialisation, and tech-driven innovation are the most promising sectors.

Describe this year in a movie or dialogue for Diwali.

This year was filled with gratitude—it felt almost “heavenly.” It reminds me of A Walk in the Clouds—like floating on air. Looking ahead, I’d say, Here Comes the Sun. For India, I think the dawn is still there. We are in the best period of our life. The collective destiny of one and a half billion people can't be bad. It's good people, meaning well for the world. So, good things will happen. I don't think every country can say that.

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