Three months ago everybody was worried about the election outcome, what the Fed would do, but right now there are just no concerns on the horizon, everyone is convinced about the election outcome, everyone is convinced about earnings and everyone is convinced about the flows. Rarely do you see a situation where there are no concerns in the market.

Sanjeev Prasad: I hope no concerns stem from unexpected sources. As you rightly said, as of now, everything looks good for India, macroeconomic situation is pretty decent, growth is looking fairly strong despite some persistent weakness on the consumption side, and the global rate cycle cut will probably start sometime soon even though that expectation keeps getting postponed by every month as we go along, but at some point in time, given that inflation and more important core inflation seems to be coming down, I would assume the US Fed will start cutting rates at some point in time; on politics or any other front, there does not appear to be any concern for now.

I was just going through your note on PSU, you are saying that it is perhaps the low float and the high amount of perception change that has happened there, but it is not backed by earnings, and over the next 12 months as well, you are not expecting any earnings improvement there, so what is the call on PSUs?
Sanjeev Prasad: We should be somewhat selective now given the broad-based rally that you have seen in PSUs irrespective of the sector and keep in mind the fact that it is not as if things have changed dramatically for certain sectors. If you look at the positive side, clearly there have been some decent improvement as far as the investment part is concerned and that is applicable for both the private households as also the public sector capex part.

So, no issues on that part of the story. Things are looking pretty good, but obviously stocks are up a lot in anticipation of a fairly strong government capex cycle. Let us see whether that sustains and for how long. But beyond that, I am not too sure because we have seen rallies in so many of the PSU names without any real change in fundamentals.

So, I do not know what the reasons are. Some of it we have tried to figure out, could be just because of change in narrative, change in expectations, so it is not very visible as of now or simply very little free float in many of the PSUs. So, I do not know, I will leave it to the investors who are finding value in some of the names, but honestly we are struggling to find value in many of the PSU names at this point in time.

The other thing that really stood out in your India strategy note was that most sectors and stocks are quite overvalued. Is the tactical call to take chips off the table and protect your gains?
Sanjeev Prasad: There is or you move to the largecaps or defensive sectors where the chances of, let us say, a big correction seem to be on the lower side. Keep in mind the fact that we are not making any call that India will see a big market correction, anyway. I am not in the business of forecasting prices, they will do what they will and as we discussed earlier things are actually pretty decent as far as the broader setup is concerned. So, I do not see the reason why suddenly we will see a big correction in the market. There is nothing on the anvil which suggests so. But the fact remains that stocks are overvalued. I do not think there is any debate or dispute about that. Barring the financial sector, banks, NBFCs, insurance, most of the sectors seem to be pretty overvalued and when I say overvalued, either you look at the context of comparative historical multiples, let us say, pre-Covid time frame, FY17 to FY19 may be a good time to look at.

That is especially true in the context of the fact that incrementally the operating environment for many sectors will probably become worse only given the fact that you are seeing a lot of disruption challenges, not many changes to the operating environment sectors in the form of new competition coming in, business models becoming weaker, business modes getting eroded slowly. So, in that context, I am just struggling to understand why the market wants to give higher multiples for sectors and stocks where incrementally the challenges are becoming more and more clear.

Look at something like Asian Paints, for example. It is a fantastic company, but it is still trading at the same valuation which it used to trade before the pandemic, roughly 50 times one-year forward basis. Maybe the market structure is changing to a negative, more competition coming in. Only time will tell how Asian Paints manages to weather the storm, but clearly the market is not seeing any real change as far as Asian Paints operating environment is concerned, which I find a bit strange. Only time will tell what exactly happened. But the point remains that somewhere investors are not even taking cognisance of the risks which are out there.

What is the risk out there? Let us understand that. You cannot discuss something which we do not know, but out of the known factors what is the risk?
Sanjeev Prasad: Let us look at the biggest concern is obviously valuation, but having said that, there has been a relevant point for the last 12 months now things have become more and more overvalued over a period of time and the more important thing is the extent of overvaluation keeps on increasing as we go down the market capitalisation curve, the quality curve and the risk curve and as I keep saying, the largecap at least looks somewhat sensibly valued, but as we go down the midcap and smallcap curve things are looking pretty outrageously expensive over there and I can give a number of examples off camera.

But having said that, I do not know what is the trigger. I do not think one fine day every investor will wake up thinking oh, I think it is overvalued and let us start selling. There has to be some trigger which will result in people’s expectations changing to negative. I do not see any such trigger for the time being, maybe I should not probably say it and bring bad luck. But yes, it does not look like there is anything on the horizon which would give me sleepless nights barring the valuation part.

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