sensex: ETMarkets Smart Talk: FOMO among investors is further keeping markets buoyant: Pawan Bharaddia

“Availability of liquidity and a sharp rise in the market, there is an increasing sense of FOMO amongst investors which is further keeping the markets buoyant,” says Pawan Bharaddia is co-founder and CIO of Equitree Capital.

In an interview with ETMarkets, Bharaddia has over 2 decades of successful investment track record over both public and private markets, said: “Recent rise has moved the Nifty valuations back to 20x FY23E and 17.5x FY24E, which looks reasonable given geopolitical and global economic uncertainties still persists.” Edited excerpts:

Where do you see interest rates headed in the near term?
The RBI took its third rate hike to bring the repo-rate to 5.4%; however, it sounded a little less hawkish. With the softening of commodity prices and crude more specifically, we believe peak inflation might just be behind us.

CPI numbers for July were 6.7% which is a 5-month low. The weak rupee might add some difficulties to the RBI policy, but we believe majorly the aggressive rate hikes are behind us.

Smart Talk

Sensex and Nifty50 are trading above key resistance levels – do you see strength in the rally?
We are in a zone where positive news on the US data is looked upon negatively with a fear that this could lead to continued aggressive rate hikes to handle inflation.

Despite this, FIIs have turned net buyers and that has helped the markets stage a smart recovery of 14% over the last month or so. Domestic liquidity also continues to be high as we haven’t seen any cut down in the monthly SIP data.

With this kind of liquidity available and the sharp rise in the market, there is an increasing sense of FOMO amongst investors which is further keeping the markets buoyant.

Having said that, the recent rise has moved the Nifty valuations back to 20x FY23E and 17.5x FY24E, which looks reasonable given geopolitical and global economic uncertainties still persists.

Our sense is that while India is structurally in a bull run given its favorable economic and demographic advantages; however, given the recent quick run up in the market we may see some time correction as well as absolute correction before seeing a structural uptrend.

In our opinion, stellar returns will now be more stock-specific than in the broader markets.

What is your take on June quarter earnings? Any new trend which you spotted that could carry in the next few quarters in a specific industry?
This earning season has shaped up better than originally anticipated with most companies managing the raw material hikes better than expected.

Despite margin pressures, higher realizations have led most sectors to perform better as compared to the same quarter last year.

Some sectors like hospitality, logistics, textile (more particularly apparel), infrastructure, etc. have even seen sequential growth.

We believe some amount of margin pressure should spill over to Q2 as well as higher cost inventories play out and hope that we see normalization coming about during the second half of this year.

Notwithstanding a potential slowdown in US and Europe, companies across sectors like manufacturing, engineering, capital goods, infrastructure, auto ancillaries, defense etc. are expecting a better H2 as they look to gain market share in exports from global competitors (China+1 impact, along with the government incentives and FTAs) along with good opportunities in the domestic market.

Overall, we believe FY23 and FY24 should both result in good growth as the geopolitical issues ease out and we see normalization coming back.

What is your view on small & midcap stocks? They have also bounced back in line with Sensex and Nifty. Time to buy or exit positions?
In our opinion a lot of companies in the small and mid-cap space are ready to outperform. Most of them have added capacities and while maintaining healthy balance sheets and generating strong cash flows.

The Nifty Small Cap 100 is still 21% below its 52-week high (while the Nifty50 is only 5% lower), for individual stocks the correction has been even more severe.

Given the recent fall, many of these companies are trading at reasonable valuations. We expect the small and mid-cap space to outperform the Nifty, but this performance is expected to be more stock specific.

We recommend investing in companies following a ground-up approach instead of a top-down approach.

How do you pick stocks for your portfolio? What is the methodology you follow?
For us investing is more about buying a business than “stocks”. Most of our investment ideas come from our deep network within the industry and/or through our own proprietary research.

We actively track over 600 companies in the micro and small-cap space to keep ourselves abreast of developments across various sectors.

We look to invest in companies that exhibit the potential to generate an IRR of 25%+ over a long-term period.

To find these winners, we usually look for businesses that are addressing a large market opportunity and where high operating leverage is likely to play out either by expansions and /or increased capacity utilizations.

Clean management and strong balance sheet and cash flows are the basic ingredients of our investment philosophy.

Last but not the least is buying such businesses at a discount to their intrinsic values. For us, the projected IRR has to come from the underlying growth in the business and not by rerating of valuations – rerating, if any helps us post faster multi baggers returns.

Our deep-drilled research gives us the conviction to hold on to our investments through various market cycles and lends us comfort even when the markets are volatile.

Foreign investors have become net buyers in India markets across sectors. What is driving the strategy?
In our opinion FIIs are playing on the India growth story. All three, FMCG, Cyclicals, and Banks are closely linked to economic growth in the country, which is expected to be good.

Many FMCG companies have been able to weather the raw material hikes well and are poised to perform well going forward as the prices normalize. Demand too is looking favorable.

Banks are in a good position to gain from RBI rate hikes in the short term, as deposit rates will increase with a lag, but the loan market is already seeing rate hikes.

In the IT space, it seems as though a large part of the growth is behind us amid global slowdown and macro issues. Metals prices too are expected to remain volatile in the short term.

DII stake in Nifty-500 at a multi-quarter high, according to brokerage report. Does this mean that in the future DIIs will be dominant players in Indian markets as the FII-DII ownership ratio is contracting?
We are witnessing a shift in investor mindsets in India. The growth in demat accounts for FY22 over FY21 was a whopping 63%.

If we look at the SIP numbers, Assets Under Management of funds linked to systematic investment plans touched new peaks on INR 6.1 lac crs.

Education done by AMFI and the want of different avenues of wealth creation seems to have tapped into the large Indian market.

DIIs have become dominant players in the Indian markets and will continue to be so as SIP inflows to continue to be strong.

Having said that, FII’s will also continue to be important for the Indian markets as global investors look to be part of the India growth story. All in all – with both DIIs and FIIs being bullish on India is good news for the Indian markets!

The 12-month trailing P/E for the Nifty stood at 22.2x, 11% higher than its LPA – sign of caution or still an attractive level to buy?
As mentioned earlier, from a long-term perspective we strongly believe that India is in a structural bull run. Nevertheless, the recent quick and sharp run up in the indices has indeed taken the valuations at slightly elevated levels.

Our sense is that we may see some time correction and/or absolute correction before we move up again structurally.

Despite this, there are enough and more opportunities in the market across sectors like manufacturing, engineering, auto ancillaries, infrastructure etc. which are still trading at reasonable valuations, strong balance sheets and looking at high growth trajectory.

We believe from a long-term investor’s perspective it is this kind of ground-up opportunity that one needs to look at for significant value creation rather than getting drifted by the headline indices/valuations.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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