“The worst seems to be discounted in the current valuations,” Sachin Shah, Fund Manager at Emkay Investment Managers, said in an interview with Moneycontrol.
He thinks the current weakness is flowing from global headlines and global markets. “…when we see the domestic economy, most of the demand indicators suggest very vibrant activity at the ground level,” he said.
After the recent major correction, he believes leaders in many of the major sectors like Private Banking, IT, Auto & Auto Ancillaries, Pharma and Telecom are available at very reasonable valuations. “Our internal assessment is suggesting that most of these large companies in their respective sectors have the potential to deliver high-teen compounded returns over the next two-three years, which is nearly 2x-2.5x of the risk-free rates,” he said.
Do you think the worst has already been discounted by the market?
The most interesting part of the Indian markets at this point is that the leaders in many of the major sectors like Private Banking, IT, Auto & Auto Ancillaries, Pharma and Telecom are available at very reasonable valuations. Our internal assessment suggests that most of the large companies in their respective sectors have the potential to deliver high-teen compounded returns over the next two-three years, which is nearly 2x-2.5x of the risk-free rates. One does feel the worst seems to be discounted in the current valuations.
Also I think the current weakness is clearly flowing from global headlines and global markets. Because when we see the domestic economy, most of the demand indicators suggest very vibrant activity at the ground level. Also our exports have had the highest-ever revenues. Even tax collections, both direct (Income Tax) and indirect (GST) have increased substantially.
It is the challenges with global supply chains, geo-political conflicts and extended lockdowns in some key places in China that have strained the supply of commodities and (caused) transitory bumping up of the prices. The other challenge has been with the US Fed and other central bankers panicking on inflation and pressing the interest –rate button, clearly a global headline with knee-jerk reactions across bonds, currencies, equity, commodities, etc., spooking global markets.
Therefore any positive change in the global headlines and/or global markets will bring back the confidence in domestic markets. The Q4 & FY22 declared results of Indian companies and the management commentary from corporates in the last few weeks gives a fair sense that all is well in the Indian economy.
Retail inflation jumped to an 8-year high in April. Do you expect inflation to hit the 10 percent mark in coming months considering the elevated oil prices?
I believe the inflation at this point in time is a bit overstretched due to extraordinary circumstances (geopolitical tensions and the China lockdown), which truly are temporary. So, as and when in the near future these events turn around, inflation will most likely cool-off quite a bit.
In fact, we are already seeing a cool-off globally in many metal prices, both steel and non-ferrous. We have also seen some major steps taken by the Indian government to tackle domestic inflation on steel, oil and hopefully will follow for other commodities, too.
Of course globally oil prices, too, need to cool off and as and when that happens (hopefully sooner than later) that will be clear evidence that the worst of inflation is behind us.
Do you think RBI will turn more hawkish by raising the repo rate by another 100 bps over the rest of 2022? Also do you expect the central bank to cut its growth forecast further in the June policy meeting?
Clearly, both the RBI and the Indian government are in action to tame inflation. Therefore they will most likely take all possible steps to get things under control. But as mentioned earlier, we have to keep in mind that the current inflation is more imported global inflation.
So, as and when the circumstances are more conducive (for e.g. lower oil prices, easing of supply chains etc), there is a high probability that the Reserve Bank will quickly move to an accommodative policy for higher economic growth.
Auto is one of the least impacted sectors in the last one-and-half-months, falling 4 percent against the more than 12 percent correction in the Sensex. Do you think the worst is over for the sector and is it the right time to buy this space?
The auto sector was one of the top underperforming sectors over the last financial year (FY22) and also the last three financial years (FY20 to FY22). The sector as we all know is a bit cyclical and at this point many of the leading indicators (freight volumes, consumer income growth) suggest it is entering an up-cycle. Volume growth is expected to be in double digits, particularly for passenger vehicles and commercial vehicles.
Also some of the recent steps by the government will help manufacturers hold further price hikes and control on rising fuel prices will not restrict demand destruction due to high inflation. Also with many auto-ancillaries being part of global supply chains, the opportunities (inquiries) now (post-Covid) seem to be culminating in real business (orders) on a global scale.
Given the sharp fall over more than one-and-half-months, what are the pockets to buy that can deliver stellar or multibagger returns in the medium term?
As I mentioned earlier, the leaders in many of the major sectors, like Private Banking, IT, Auto & Auto Ancillaries, Pharma and Telecom, are available at very reasonable valuations. Our internal assessment is suggesting that most of these large companies in their respective sectors have the potential to deliver high teen compounded returns over the next two-three years, which is nearly 2x-2.5x of the risk-free rates.
For multi-bagger returns, investors may have to focus on mid & small-cap bottoms-up opportunities. Some businesses, in sectors like Travel & Tourism, Logistics, Regional Private Sector banks, Engineering and Consumer, do offer a potential of high returns over the next 3-4 years.
How has the current fall in the market impacted the PMS industry as a whole. Any impact on NAV, redemption pressure for your funds?
It is quite interesting that we haven’t seen too much concern (or panic) from our investors in recent weeks. In fact, any inquiries are on whether they could increase the allocation to equities to capitalise on the current weakness in the markets.
Actually over the last few years now, we are seeing a clear structural shift in terms of investors’ mature approach towards equity investing.
Around a decade and a half back, most investors that I interacted with had a transactional perspective towards equities. Today most of them are truly perceiving equities as an asset class for their long-term goals, either retirement or passing to the next generation.
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Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.
