Shibani Sircar Kurian, Senior EVP, Sr. Fund Manager & Head -Equity Research, Kotak Mutual Fund, says the Nifty (largecaps)is trading at about a 5% premium to its historic average multiples, while the midcaps are trading at about 20-21% premium and smallcaps are trading at about 25-26% premium to their historic average multiples. So, from that perspective, valuation wise, near-term risk reward seems to be in favour of largecaps and that is something that we continue to believe.What do you make of the cool-off that we are seeing because at one hand, you have people talking about how we are likely to see big rally ahead of elections and then, of course, the other camp believes the valuations are a bit perky right now, above the five-year averages and it will all depend on the direction that we get from the earning season now.
Shibani Sircar Kurian: After the great run-up that we have seen in the market over the last year, year-and-a-half, some degree of volatility is to be expected and that is something that we will have to contend with. However, if we look at it from a market perspective, the ingredients that have driven the rally still remain fairly intact.

Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
Indian School of Business ISB Chief Digital Officer Visit
IIM Lucknow IIML Chief Operations Officer Programme Visit
IIM Kozhikode IIMK Chief Product Officer Programme Visit

So, the trinity of macro stability in terms of GDP growth, where India remains among the fastest-growing large economies of the world over the next five-year period. Second is corporate earnings delivery has been fairly stable and robust and the expectation as we go into the quarterly earnings season is that earnings delivery and even consensus earnings estimates remain fairly intact, so that part also is what is driving markets.

The third aspect has been flows, specifically, of course, the domestic flows and even the FII participation which has come back in the month of March. So, from the ingredients’ perspective for a market, those ingredients are pretty much intact. However, obviously, we have to keep in mind valuation. Our belief has been that in terms of valuation, risk reward at this point in time is favourable for largecaps vis-a-vis the mid and smallcaps.

If we look at the largecaps, the Nifty is trading at about a 5% premium to its historic average multiples, while the midcaps are trading at about 20-21% premium and smallcaps are trading at about 25-26% premium to their historic average multiples. So, from that perspective, if you look purely at valuations, near-term risk reward does seem to be in favour of largecaps and that has been our view and that is something that we continue to believe.

Would you concur that the risk reward is quite favourable for IT right now?
Shibani Sircar Kurian: Yes, so, IT is in a pretty interesting spot, if you ask me, especially on the largecap side. Midcap, one may debate about valuations. If you just take a step back and see what has happened in the sector over the last year, year-and-a-half, macro instability, higher interest rates has meant that there has been significant amount of deferment, especially where discretionary IT spend has been concerned while companies have focused specifically on cost take out deals. So, while deal wins have come through, the discretionary segment in terms of the deal wins have been absent.

We believe going forward, there are two aspects to it. From a tactical perspective, as and when the rate cut cycle possibly starts and you start seeing some amount of macro stability over the next, say, 12-18-month period, some of this discretionary spends which were deferred should start to come back and therefore, that adds to some element of growth over the next 12-18-month period. Structurally, we believe that the sector is going through a transformation. In the past we saw where digital came through or when cloud was adopted.

Similarly, on AI, a lot of activity is happening. Companies are exploring ways to use AI to improve productivity and therefore overall processes will likely change again over the next few years or in the medium term and that also offers a structural runway for growth where IT is concerned. If you look at the way the sector has behaved, clearly midcaps, given their growth differential and higher growth, have actually outperformed largecaps. However, we believe that from a valuation risk reward perspective, the largecaps are fairly well placed at this point in time and therefore, at this point, from a sectoral perspective, we would be preferring largecaps over midcaps. Within the midcap space in the IT sector, there would be select names where, again, growth has been strong and is likely to remain strong and those are the names that we would evaluate in our portfolio.

The realty sector is supposedly in a decadal bull run, coming out of a decadal low and it seems the story is not quite done. Your view?
Shibani Sircar Kurian: Absolutely. So, the sector has seen significant structural changes which has obviously driven some of the moves that we have seen. One clear factor or one clear trend that has emerged is that with the kind of changes that we have seen from a policy perspective, clearly the organised space has gained market share and that is reflecting in terms of the numbers that you are seeing specifically where some of the listed players are concerned and that is something that we believe will continue at least in the near term.

The other debate and the point of debate that is there is of course the valuations given the fact that there has been this sharp run up. The other way to possibly play the sector and the theme of housing is to look at the entire home building space and cement. Cement has been a sector where we have been positive. Cement derives a significant amount of its demand from the real estate space as the rest of it comes from the infrastructure segment.

In the near term, there is again debate on pricing, we believe that volume growth should remain strong going forward as well and therefore cement is one of the ways that serve as a proxy to the entire real estate space. The other segments to look at will be the home building segments. Of course, there is some degree of margin headwind at this point in time but what we believe is that overall if you look at the home building space, the growth comes with a lag and therefore as real estate sales remain strong with a lag you should see that play through in terms of volume growth, specifically for the home building segments as well and therefore again a proxy to the real estate space would be the entire home building segment as well where we continue to remain positive.

This year it seems like the summer is going to be scorching. We have already seen the initial signs of it and the rainy season or the monsoon is expected to be normal but it will probably start a little later, that is the conversation we had with the Skymet management and we have been speaking with the management of Blue Star, Vijay Sales, etc, who are talking about how the sales of AC and other products have gone up. Do you think this is a theme that investors should be looking at playing or this is something which is very difficult to time?
Shibani Sircar Kurian: As you rightly pointed out, there is likely to be a hotter summer. It is something that we need to brace for and that is possibly also showing through in terms of numbers where some of the AC segment is concerned. The consumer durables pack per se has seen significant headwinds where there has been slowdowns specifically because to some extent the slowdown that you have seen on the consumption side where mass consumption is concerned. I think the fact remains that a lot depends on how the monsoon pans out.

If the early signs, as you are rightly mentioning, state that monsoons will be positive or will be normal this year, we could possibly see some improvement where rural income is concerned and I think that is extremely important to get consumption back on track.

We believe that if the kharif sowing is normal and we start seeing a fairly good kharif output towards the second half of the calendar year, that will help in terms of supporting the rural income. Inflation is under control and therefore from a real rural wage perspective that bodes well. So, this is something that we will watch out for where the entire consumption story goes, but as we were discussing earlier, mass consumption has clearly been lagging the premium end and therefore monsoons play a very important role in getting the rural income trajectory back on track.


Source link