What will be the impact of the crisis in the US banking system on markets globally and in India?
It is difficult to predict at this stage if this will lead to bigger damage, but this will lead to higher risk aversion in the system and anyone dealing with these banks will now come more into the limelight. The challenge to the stock markets at this stage will not be significant except if there is a case of continuous collateral damage.
Indian bank stocks have fallen after SVB’s collapse. Do you see any impact on banks here?
Stock prices may move up or down depending on other factors like foreign institutions moving away because rates are rising or some other factors. I do not think there is any direct or indirect implication of this event on Indian banks. Indian banks have not lent only to top-notch corporates in the recent past and with the investment cycle just beginning, it will take at least 3-4 years for any stress to build up.
Where do you find buying opportunities?
There are a few places where earnings will grow faster than the Nifty. The first one is engineering and manufacturing where the whole cyclical demand is coming back after many years and order books are high for companies across the board with the whole investment cycle due for take-off in India. This cycle is real and hence earnings visibility is high but valuations are on the higher side. The second place is banks which have the best balance sheets we have ever seen. Despite the run-up, they can still deliver reasonable growth. FPIs have been selling because they own a lot of them and the correction is giving you opportunities to participate. Leaders in the space have corrected either due to being over-owned or due to the sell-off in the last 15 months. The third area is consumer staples where earnings will get better if there is normalisation in rural growth and earnings should trend to 15%, making the current levels attractive.
What is your outlook for pharma stocks?
There is a medium-term opportunity in pharma as valuations are reasonable. Branded business share in profit is rising and accounts for 30-90% of the net profit for a lot of companies. For companies where there is an increase in domestic profits, their earnings are sustainable and attractive. Pharma is a long-term growth story given that India is the second-largest country when it comes to the elderly population in the world. While the younger population is growing at 1.5%, the 50-plus age group is growing at 4%. This is likely to create a big market for the next decade.What returns should investors expect from equities over the next three years?
With the Indian markets trading at 18-19 times multiple, the rerating scope is limited. Given this, returns will be linked to earnings growth. Over the next three years, as things normalise and rural growth comes back, Indian corporates have the potential to deliver 13-15% earnings growth. Unless there is a significant derating, this is the kind of return Indian investors can expect.
What is your assessment of valuations in the Indian markets?
When compared to other emerging markets, Indian markets are at a premium by a huge margin despite underperformance in recent months. We feel that since there will be a modest recovery in earnings, we are in middling valuations. We neither find the market very expensive nor very cheap. There are selective opportunities, especially in the mid- and small-cap spaces where corrections have been pretty sharp.
