Let’s talk about India’s growth outlook as on the face of it, the geopolitical tensions have almost gone and India has a lot of positivity to look towards, the seasonality factor, the onset of monsoon, the GDP numbers, the good manufacturing upkeep. What do you feel is the texture of the Indian markets as far as the growth outlook is concerned?
Devang Mehta: There has been a lot of improvement in fundamentals, in macros, and in micros. From September to April, we had eight difficult months where not only the markets corrected, but sectors, businesses, and everything corrected and there were reasons for that. In hindsight, we know that there was no capex happening and consumption was suffering. Inflation was not trending down. There were geopolitical tensions. We had tensions in our own backyard. Now, a lot of those things have suddenly vanished.
In the last two, three, four months, if I can dissect the data points, GDP growth is again on an upward curve. Inflation has come down drastically as we are at a five or a six-year low. RBI has been on a rate cutting spree. Phase-wise, CRR has been cut by 100 points and that has infused a lot of liquidity to the markets. It has improved the sentiment of the economy and markets as well. Whatever the government did in the last budget to boost consumption or investment, has also taken shape. The most important point is capex which was dwindling last year because of state elections and the national elections. I think that has also come back with a roar from the government side at least and we are hearing that private capex is also starting albeit slowly.
We are at the start of the new earning season, and we are in for good times. Yes, there may be smaller corrections on the way, but the texture of the market, the colour of the market looks interesting and there will be more green than red for the next six months to one year.
Let us talk about specific triggers. What are your expectations from Q1 earnings, which are a few days ahead? There’s a lot of pressure and interest in the IPO market as well. How are you looking at it and what are your expectations from the Q1 results in the new financial year?
Devang Mehta: This quarter seems to be a quarter where we will lay down the foundation stone of what is going to come over this year. Probably there will be a bit of miss and hits as well, but most importantly, what the management talks about for each sector, for each theme, for an individual company, what is their body language, what is the commentary, and whether they are positive not only on the economy but also on a particular sector where see tailwinds like capex for certain sectors.
We already know that capital goods, infrastructure, power, and automation will have good numbers because they are getting more and more orders. Execution capabilities are being shown by a lot of such companies. Also, domestic consumption seemed to have improved, more so the upper end consumption. As for the lower end consumption, even in the RBI report, they talked about rural consumption improving a bit. We will probably see some green shoots over here. Financials, some banks, some financial companies – be it depositories, exchanges, or wealth management companies – can come up with a good set of numbers. Wherever there is global dependence, the stocks have corrected big time, but companies in the IT space, exporting companies might face a bit of a difficult time. I am not saying the numbers will be very weak, but I do not feel there is enough scope and wherewithal to give great numbers there or see robust profitability and revenue growth. These couple of sectors would be a miss. But the sectors I talked about initially, there we can see a lot of green shoots.Coming to the indices, we see a lot of sectoral churning, but at the same time, broader markets versus the benchmark is another talk in town. What is your view on the broader market’s performance because broader markets are seeing good flows? Is it going to outperform the benchmarks or should one stay with the promising benchmarks?
Devang Mehta: It is a very good question that is very close to my heart. I always say that India’s market cap today is somewhere around say $5 trillion, around Rs 450 lakh crore. There are only four companies which are above Rs 10 lakh crores. There are around nine companies from 5 lakh crore to 10 lakh crores and around 82 companies with Rs 1 lakh crore to 5 lakh crore market cap. So, the bulk of India’s companies have below Rs 1 lakh crore m-cap. We can call them midcaps, or smallcaps, or larger midcaps.
But there are a lot of companies or sectors or themes which are emerging. For example, the construct of Nifty today is: 30-35% financials, around 12-13% oil and gas, around 13-14% IT, and 8-9% would be conventional FMCG type of consumption themes. So, 70% of Nifty is already those companies which have done well over the last three, four, five decades.
But a lot of companies that do not find representation in Nifty are in the broader markets, and a lot of such themes like engineering, manufacturing, capital goods, power automation, smaller discretionary consumption names, some innovative pharma companies, and some of the financials are not a part of Nifty right now. But there is a lot of scope for such types of companies to enter the key indices over the next five-seven years once they grow in market cap and then free float as well.
In the broader markets, one has to have a three- to five-year horizon, and has to look at a lot of broader market participants. I am not saying Nifty would not do well, probably Nifty can give the earnings growth of 10%, 12%, 13% over the next couple of years, but there will be a lot of companies in the broader markets where earnings would grow at 15%, 18%, 20%, 22% as well.
Which are the sectors you are cautious on right now? These are sectors where you were really bullish and riding high on, but now due to several factors you have a cautious approach?
Devang Mehta: Wherever there is a bit of global dependence. It is not that you need to stay far away from them, but you need to face a bit of volatility and music because you know that nowadays global markets probably every single day the narrative changes. Companies which are linked to maybe tariffs, but most importantly companies which are into the export domain, like a bit of IT, metals. I am not saying metals will not do well, it might do well over the longer term but you will face a bit of volatility because you do not know what happens to the Chinese situation, the US and Europe. That’s where a lot of volatility comes to the proceedings.
My sense is that there is so much domestic opportunity right now, that you do not need to go and buy companies with global linkages. That is the sense I get.
