“What we are seeing now is that the top line seems to be moderating across the board, across most categories, except let us say the industrials, engineering, some of those tend to do well,” says Vinit Sambre, DSP Mutual Fund.

What is your market view in the near term? There are a lot of triggers. Locally, there is election. Globally, everybody is worried about which way interest rates would move.
You spoke about the near-term outlook, so first of all let me just lay the long-term picture. The long-term outlook for us remains positive and generally as fund managers, we tend to remain biased towards equity, so I think that is what drives our long-term view. But I think the near-term clearly is looking a bit more challenging and let me just lay out a few of our thought process, how we are thinking about the near term.

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So, I think clearly we have come out with a very strong growth phase over the last two years or three years in terms of the earnings momentum and we saw that these earnings were really driven by top line post the pandemic and then in the second phase it was the margin expansion.

But what we are seeing now is that the top line seems to be moderating across the board, across most categories, except let us say the industrials, engineering, some of those tend to do well.

But excluding that, we are seeing that the top line is moderating and now most of the earnings benefit which came because of the commodity cooling off, those I think are also going to get challenged over the next one or two quarters maybe because we are seeing that commodities, including crude and other metals and all those have flared up a bit.

So, I think what was benefited, I mean these companies were seeing benefit because of expansion of margins, those will go away. And in terms of the growth, one will have to think about how the top line comes back which is going to be the principal driver of the earnings.

The second aspect is that if we just break down the overall growth into buckets, we saw that largely the industrials, capital goods, engineering which basically on the back of very strong spends by the government is necessarily doing well, I believe that over the next two quarters as we go through this election which you mentioned, because of the model code of conduct there could be some moderation again in the order booking.

I mean, even there we may see some bit of growth maybe cooling off a bit. So, I think all in all, considering that and the global macros which are worsening, I would say that market could enter into a phase of consolidation over the next one or two quarters and after that maybe it will sort of seek the directions depending upon how the reforms they talk about and how the consumption basically recovers from where we are today. So, I think that is broadly the thought on the basis of the fundamental aspects of the companies.

Do you still feel that one needs to sort of disconnect and figure out what kind of market cap should you be tilted more towards? I mean, it has really been the year of smallcaps and midcaps so far and even right now amidst all the global volatility they still are showing a lot more resilience at a net basis, but would you say the time has come to perhaps tilt a little bit more towards largecaps, that is where you are safer or do you think we should not be making any such distinctions?
Ideally, I would not like to make distinctions because it is very difficult to time these entry and exits and we have seen over the last, let us say five-six years the time which generally is taken by the midcaps and smallcaps to catch up is actually coming down.

Earlier one category performed and the other category did not perform for some time and which basically gave time for the investors to make those shifts.

But I think right now, that these times have shortened and generally if the investors have a decent balance of large, mid, and small depending upon the risk profile it should be fine.

But at the same time, if in terms of the asset allocation, if somebody has got skewed towards more smallcaps at the
moment, I think definitely it also makes a case very reasonable to take some position out of those and reallocate in terms of the better asset allocation.

So, I would say that it is very investor specific guidance. But on the whole, I would say that just maintain your asset allocation mix for a long time and that should pay off.

Given the fact that it seems like we are in a sort of a Goldilocks moment for India with healthy macros, policy initiatives, earnings growth, inflation having moderated. In light of this, how are you looking at the capex related sectors performing?
I think clearly what has happened is that as far as India is concerned, we have got benefited because of the very strong execution by the current government. I think the strong execution around various segments has worked well and we believe that there is a continuity in those reforms and definitely that has led to even our outlook on some of these segments within the engineering, capital goods and infrastructure remaining positive.

Maybe we may not see a huge amount of re-rating from where we are today when we look at the valuations because valuations have broken the historic peaks and that is something which we would like to remain cautious about.

But given the growth metrics, we want to participate in this category. We would like to remain invested and any opportunity whenever it comes because of whatever market consolidation, external environment, we would be open to actually increasing our exposures into these segments. So, I think broadly, we are positive on these categories which are linked to the capex story for India.

You are cautious in the near term about top line growth, but you are bullish on banks. Now, banks are a function of what happens to the economy. If the top line is sluggish, that means credit offtake will also slow down. They both are not getting connected.
I think it is a very fair point and when I mentioned that the near term is looking challenging, we have to look at it from the perspective that overall one has to remain cautious around how one is allocating the exposures into which categories and broadly if we look at various segments, either you have valuations, they are very expensive or they are expensive.

I mean in general when we are looking at the market currently, there are no areas where you will find valuations which are reasonable, except I think banks.

Banks are still quoting at decent valuations when we compare it with the long-term averages. More importantly, the asset quality profile of the banks are still pretty decent as of now and we do not think that there are any data points which are suggesting that there could be meaningful deterioration going forward.

So, I think that is a one strong point. And it is okay tha they are in a bit of a slowing phase when the banks could also moderate in terms of the loan growth, their NIMs may also lead to maybe lower growth in terms of PPOP but till the time the asset quality is intact and they have the long-term growth prospects, we would want to participate in the banks because banks are another way of participating in this India growth story.

It is proxy to the broader economy and we would hence remain constructive on the banking sector. At the moment though, while we are also cognisant of the fact that the banking sector may go through a bit of a slowdown, we are trying to look at the NBFCs within the lending franchises where I think the growth metrics will still be okay and one could look to have slightly higher exposure on NBFCs versus banks at the moment and then maybe over the course of next one or two quarters, one can relook at these allocations again.

Utilities could get derated. Utilities means companies which are essentially producing power or supplying power or distributing power. Now, the basic understanding for all of us is India will grow, energy demand will grow, utilities are in a better shape, 24×7 electricity that means we need more electricity, Bombay has higher temperatures, more AC, so should not utilities do better?
I think fundamentally the demand drivers are there, but the way the stocks have got re-rated is something which we do not understand. Utilities also mean that their returns are capped at a particular level.

One cannot think about generating extraordinary returns in a good cycle. So, I would say versus that when we look at the valuations we think that there is some bit of disconnect and hence we felt that there should be some room for these businesses either to consolidate, time correct or give some better valuation numbers.

So, I think that was the whole point, but there are other ways to play that whole power story. There could be power finance businesses which are looking interesting to us. There could be power equipment plays which are again looking good from that perspective because anyways as the demand sustains, the ancillaries will also tend to do well where at least you have companies making decent ROCs and one can think of the valuations which can be slightly higher than the normal.


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