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Everyone is happy that the correction has kicked in. At least the bubble and the euphoria which got created, will be contained.
Ashwini Agarwal: I completely agree with you. There were a lot of excesses building up in the market, especially if you looked at the valuations of several government-owned companies or you looked at the valuations of several smallcaps. If you also look at the earnings, the way the earnings have played out during the December quarter, hopes were running significantly ahead of what has been delivered. Putting all of this together, it is good that a small correction is setting in. My personal view is that it should go a little bit deeper. That is what I think. But let us see how this plays out.
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PSUs are the leaders of this bull market. But is the leadership now coming at the cost of risky valuations?
Ashwini Agarwal: I would like to think so. See, principally what happens is that public sector companies have certain inherent traits built in a PSU than in the private sector companies. So to expect that PSUs will operate with the same efficiency as the private sector is a little bit of a stretch, in my personal opinion.
Second, if you see how swiftly some of these stocks have done relative to the others, and if you were to look at some of the number four, number five PSU banks versus the market leader, the price action suggests to me that it is highly speculative as compared to something driven totally by fundamentals. And that is something that I would say is true even for a whole host of smaller PSUs where the free float is fairly small.
I think there is a significant amount of froth in the public sector enterprise system. There might be some leaders which are still reasonably priced. But I think by and large, it is my opinion that the public sector enterprise as a whole is quite expensive as a stock universe.
Not an apple to apple comparison but wanted to understand, what sort of an aftertaste does the market get after incidents like, say last year, what happened with the Adani Group, with the Hindenburg case, and now with Paytm? I mean, after these serious, now that they are facing a serious risk of customer exodus, after RBI putting curbs on their payments bank?
Ashwini Agarwal: Accidents are a part of the marketplace. If you zoom out and think about the last 20 years, there have been so many situations, you had the MS Shoes scandal, you had various other companies that went into an incident, for example, completely rattle investors. It is obviously painful for those who own it. But by and large, if you are running a diversified portfolio as an individual or as a fund manager, whichever may be the case, the damage to the aggregate portfolio should be fairly limited. Booms and busts all produce extraordinary gains and extraordinary losses and this is part and parcel of it. I do not think it damages the underlying story for India or the global sentiment on India in any way. That is how I look at it. So it is not such a big deal in my personal opinion.Given that the expectations are riding high, the overall capex theme is really going to boom owing to the fact that it is also election year. What is your view when it comes to this entire pocket?
Ashwini Agarwal: I have been waiting for private sector capex to kick in and that has not really happened in a big way. If you look at the interim budget numbers, while the government has continued to allocate money towards capex in comparison with consumption-led expenditure, the impulse factor is lower. By impulse, I mean year on year change in terms of how much money is going into government capex.
Also, if you look at the liquidity situation, it is tight because the government has not spent a lot of money over last year. So while there is capex going on, the pace is slower than what was envisaged. Going ahead also, the government would like the private sector to step in. That is lower than expected at this point in time is how I think about it.
In the meanwhile, the stocks have moved up and everything has rallied. Valuations in certain cases are completely crazy – 60, 70, 80 times or 30, 40 times for construction companies. I do not think that these valuations are sustainable. We have to remember that capex-led plays are inherently cyclical. There are deep cycles and three-four years of boom followed by three-four years of losses. You have to pay a lower PE multiple for peak earnings and you have to buy them when the chips are down. So one has to be careful here as well.
Would you say that now it is time to raise 10-15% cash and sit on it, which is disproportionately higher than what you have run in a long time?
Ashwini Agarwal: I think markets are expensive. I expect a reasonable amount of consolidation, maybe a deeper correction. I do not know which one it will be, time correction or price correction, but one of them has to happen. If I look at 2024 as a year, I would be very happy with the market going nowhere through the year. There will be, of course, stock opportunities on a bottom up basis, which I hope I will find. By and large, is this a good time to be holding some cash? Yes, absolutely. One should book the profits where valuations appear to be disproportionately high or the story seems to be stretched. Too much of a good thing is never a good thing.
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