In an interview with ETMarkets, Javeri, said: “We believe the India consumption theme will do well. The auto-auto ancillary space is one space where the local theme players can pick companies like

Maruti, Hero MotoCorp and Bajaj Auto” Edited excerpts:

We have managed to hit 60K on Sensex and 18000 on the Nifty. Do you think the worst is now priced in terms of geopolitical concerns, rate hike, inflation, etc?
While Samvat 2079 has started on a better note, it is more relative in nature. The Nifty50 index has been flat for the last 12 months which reflects time correction. However, many other emerging markets (EMs) like Indonesia and Brazil have seen positive returns over the past 12 months. So, the 12-month performance of the Nifty50 index has been a mixed bag. Coming to more real numbers, even as the inflation for India has been sticky on reported numbers, the pace of rise has been decelerating. Thus, input prices (read metals and minerals) within WPI have been declining for the past 5 months. Core CPI has been stable for the past 4 months and isn’t rising.
Thus, we believe that worst of inflation is behind us. However, Indian manufacturing will have to be agile in adding capacities over the next 4-5 years because demand trends look very strong. In light of easing inflation concerns, the rate increases to some extent, are also as a response to rising global interest rates because we cannot be out of sync with other economies. The spread between US 10-year GSEC and India’s 10-year GSEC needs to be at around 400bp so as not to affect global debt fund flows.

After the recent correction, benchmark indices are just 3-4% away from respective record highs? How do see valuation stack up when compared to other EMs?
As we suggested earlier, while our benchmark Nifty 50 Index has been flattish YoY, there are few emerging markets that have performed even better. The stock market performance will be the outcome of both, how the economies will fare and the valuations. I think Indian corporate and political brass have responded really well to the COVID fallout. Let me elaborate – (1) India corporate have right-sized costs as well as balance sheets well post COVID which means cash returns of invested capital have improved dramatically and at 15%+, CROCI are best in last 15 years (2) financial leverage for Indian corporate have improved really well with D/E ratio of BSE500 ex BFSI having improved from 0.9x to 0.6x over FY17-22 (3) government is doing its own bit with supply side responses in terms of spending with FY21-26 glide path of double-digit growth in Capex (4) the financial companies are in as great shape as FY03-08 with tier I ratio of all banks >10% and provision cover >75%.
When this kind of structural change happens in the economy on the positive side, the stage is usually set for the next 5-7 years for great economic performance and consequent positive impact on equity markets. I need to not remind the readers about similar changes having happened between FY98-03 and the behavior of the economy and markets between 2003-10 (ex-GFC year). In terms of valuation, while India remains the most expensive at 22x TTM earnings, it also offers better EPS growth over FY23-25, and hence on a PEG basis, we are not too expensive vs other EMs.

What is your take on the September quarter results which have come so far? Do you have more downgrades than upgrades in the forthcoming quarters?
The numbers for most relevant sectors have been great. For example, auto, BFSI and IT have seen better-than-expected numbers while metal stocks are likely to see downgrades. I think, as more structural sectors (and with higher weight in index) like the former perform better on earnings vs later (like metals, mining, and oil & gas), it will be overall positive for earnings growth.

The rupee has been all over the place. A lot has been talked about depreciation and appreciation. Where do you see the currency headed? And, does it also mean that firms with high Dollar debt will be under pressure?
Key highlight of movement in INR is its appreciation vs many other DM currencies like EURO and GBP. While, the RBI has spent a good amount of Fx reserves to step INR depreciation vs USD, two things are very important (1) the run down in FX reserves as 16% of opening reserves of FY23 is one of lowest spends in history to defend the INR and (2) while globally every currency is battered and bruised vs USD, one cannot and should not expect INR to behave differently because our exports’ competitiveness depends a lot on same. A stronger currency and competitive exports can’t go hand in hand.

Which sectors are you bullish on and why?
We are bullish on India manufacturing in light of the reasons mentioned above i.e., improve productivity, stronger balance sheets, robust government CAPEX, and availability of funds to expand capacity due to a robust financial system. Some sectors where we believe strong earnings growth is expected are Auto, capital goods, building materials, and consumer goods. We are also generally bullish on BFSI.

Diwali adds glitter: 39-tonne gold worth Rs 19,500 crore sold this Dhanteras, up 30% YoY. Households are still tempted to invest in Gold vs equities. Or it would be wrong to equate the same as both are for different purposes. What are your views?
While I am no expert on asset allocation, I would look at it differently. The Indian consumer spending such a robust amount of money on discretionary spending like gold jewelry and housing is the manifestation of strong growth in income and wealth. The Indian consumer has been missing completely from action for the last many years and this time the binge in consumption has continued even 12-18 months post unlock phase (post delta wave). This is no longer vengeance or latent buying anymore. The Indian consumer is back with a bang.

How should one play the small and midcap space?
The premium that Indian small and midcap space used to command over the large cap is still not back to its peak for a variety of reasons. Over the next few years, as small and midcap companies also reap the fruits of the structural changes mentioned above, we expect them to do better than large cap. In the next 4-5 years, we will see strong performance coming from quality small and midcap companies.


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