In an interview with Zeebiz’s Kshitij Anand, Shah said that markets run-up in recent times is more like catching up with the mean and covering up for the underperformance of the previous years:

Q) The market seems to be shaky ahead of Diwali, but with 30% rally already seen in Nifty50 – what is your view on market? 

A) Indian equity markets, like most of the global equity markets, have been on a rollover in last eighteen months. From the lows of March 2020, the large-cap indices have gained nearly 100% and the mid & small-cap indices have gained by 160%-190%.

But this is more to do with the low base and crash during March 2020 and therefore the long-term average returns over the last 3 years, 5 years, and 8 years for large caps and mid-small caps are still in the range of 15%-18%.

We, therefore, believe markets run-up in recent times is more like catching up with the mean and covering up for the underperformance of the previous years.

Q) I am sure everyone would be celebrating this Diwali as most portfolios has turned green. But, what are your expectations for Samvat 2078? What should be the investment strategy?

) For the last few quarters developments at the corporate level, government policy level, and overall ground-level demand, both in rural & urban India are pointing towards an all-around economic recovery & corporate earnings growth.

The recent high-frequency data indicators are all encouraging towards the same. In the recent quarter, there are some more affirmations (double-digit export growth) and geo-political developments’ (China+1 and China GDP slowing down) leading us to believe the potential for India’s manufacturing and exports is about to unleash and will probably turn out to be a multi-year high growth story for Indian economy.

Q) FIIs are selling at a time when Sensex and Nifty50 hit fresh record highs. What seems to be worrying FIIs and is it a sign of caution which retail investors should take note of? 

A) FIIs have had a mixed trend, after being net sellers of around Rs11,000+ cr in Q1 FY22, they turned net buyers of around Rs12,500+cr during the last three months (Q2 FY22).

During the current financial year, the participation of domestic retail investors has been very strong, reflecting from the 3cr new demat accounts activated over last eighteen months and also retail volumes as percentage of total daily volumes have increased substantially from 39% in FY20 to 44% in Q2FY22.

The DIIs (underlying investors are domestic retail investors) too were net buyers of Rs 45,000cr (US$7bn+) in the first six months of the current financial year (1H FY22).

Therefore, it is the domestic investors ruling the house this time.

Q) September quarter earnings remain a mixed bag. What are your views on FY22 earnings expectations? 

A) Over the last few quarters, we are witnessing a sharp economic recovery. Most of the high-frequency lead indicators are suggesting a strong rebound in economic growth, viz.,

1. E-way bills issued per day for Q2FY22 at 21.24 lakhs, have witnessed a 2-year CAGR of 12%. Even for Q1FY22, when strict lockdowns were observed across the country, the E-Way bills issued per day stood at 16.9 lakhs, a number equal to Q1FY20.

2. The railway freight per month for the first five months of FY22, stood at average 112.5 mn tonnes, a 3.5% growth over a similar period in FY20, and just a 3.4% decline over H2FY21

3. The GST collections for H1FY22 averaged at Rs1.13 lakh crore, a 2-year CAGR of 6% over H1FY20. In fact, in all likelihood, the central government is likely to exceed its GST revenue target for FY22 by almost 10-11%.

4. The credit growth has also improved meaningfully at 6.8% YoY in Q2FY22 vs 6% in Q1FY22 and material improvement from the bottom of 5.1% in Q1FY21.

5. We have also witnessed a very strong profit trajectory for the majority of the listed companies over the last 3-4 quarters.

6. The profitability of the corporate sector is also reflected in ~23% CAGR in corporate tax collections (Rs1.7 lakh crore till Aug-21) over last two years. Even personal income tax collections have grown at CAGR of 9.7% in YTDFY22 over last two years.

For the above figures, we have made all comparisons over FY20 to show more normalised picture. It must be noted that H1 of FY21 was completely marred by nationwide lockdown.)

Most of the above indicators make us believe India Inc is entering into a virtuous cycle of multi-year profit growth over the coming 3-5 years.

Q) We have seen a strong rally in small & midcap space and now that the tide seems to be taking a cautious stance – do you think high beta stocks could come under pressure? 

A) As I just mentioned, our belief is that we are probably entering a virtuous positive economic cycle and therefore whenever there are tailwinds in the economy it helps the good quality mid and small companies top accelerate their earnings trajectory and leapfrog into the next league of size. We, therefore, believe that the outlook on the mid-small cap remain buoyant.

Q) Which sectors are likely to lead the next leg of the rally? 

A) In the post-covid environment, both the Government and the manufacturing sector have shown a tremendous amount of seriousness and excitement through PLI schemes and other steps for Public & Private Capex to accelerate India’s growth trajectory.

The government has also been quite serious on disinvestment and privatisation plans, it is very confident and firm on raising Rs 175,000cr by asset sales in FY22.

We believe sectors like Auto & Auto –Ancillaries, Pharma & Health Care, Industrials, Logistics, BFSI, Consumer Products and Domestic Outsourcing should perform.