In an interview with ETMarkets, Prabhu said: “The last couple of years has seen an emphasis of growth investing. We see value investing as a theme gaining traction over the next 12 – 18 months,” Edited excerpts:
While the Indian market has remained resilient amid global volatility and the Adani story. Where do you see markets headed? Any near-term headwinds that investors should watch out for?
We see the market largely rangebound at the current levels. The market is simultaneously facing a number of tailwinds and headwinds.
The headwinds consist of continued inflationary pressures, a possible delay in the much-anticipated pause in the rate hike cycle and a recession in developed economies.
The tailwinds include strong economic fundamentals, public investments in infrastructure, the revival of rural demand against the backdrop of good agricultural production, a healthier corporate balance sheet, and starting of a private capex cycle.
While the market will witness bouts of volatility, we see underlying resilience to bounce back from adverse events.
Some of the banks have already started raising rates – do you see the realty, auto, and capital goods sectors taking a hit?
The Repo Rate is currently at 6.50%. If we look at our Monetary Policy history, we had rates at or above 6.50% on several occasions in the last two decades.
Hence, the Repo Rate of 6.50% and 10-Year sovereign yield at 7.30% – 7.40% range is certainly not unprecedented in India. Secondly, given that CPI inflation is at 6.5%, the real interest rates in India are close to zero.In that sense, the Monetary Policy is not tight at the current level of inflation. While we do see some impact in interest rate-sensitive sectors, the impact will be modest and not dramatic.
In a rising interest rate environment how should investors play the market? Does it make sense to reshuffle asset allocation?
It is in the interest of investors to have a diversified portfolio in terms of asset allocation. Given the 250bps interest rate hike by RBI, the appeal of fixed-income investments will increase.
However, the debt market may also see volatility, and returns on fixed income are unlikely to be linear. It is likely that weightage for fixed income asset class will increase over the next 12 – 18 months.
Where is the smart money moving? What is the data telling you?
There have been some outflows from FIIs during the year. The outflows were offset by strong flows from domestic institutional flows from Mutual Funds, Insurance Companies, and Pension Funds (NPS).
We do some profit booking in select stocks/sectors when valuations are not matched by fundamentals. However, money gets redeployed in other stocks/sectors.
The last couple of years has seen an emphasis on growth investing. We see value investing as a theme gaining traction over the next 12 – 18 months.
Priority of the Budget is to ensure that Rs 10 lakh crore earmarked for capital expenditure is actually spent within the fiscal 2023-24 for keeping up the growth momentum – FM said in an event. Which sectors could impact from govt CAPEX?
The increased Budget allocation to public spending on infrastructure is heartening. The rollout of the capex spending will have a positive impact on sectors like construction, steel, cement, metals, electrical goods, construction equipment, pipes etc.
In addition to public expenditure, we expect a revival of private capex in FY24 driven by PLI schemes, China + 1 strategy etc. The upturn in the private capex cycle will also provide a boost to these sectors.
What is the ideal methodology for picking the bottom up picking? What is the checklist one should follow?
Bottom-up investing style focuses on identifying companies with strong fundamentals that are expected to perform well over the investment horizon.
There is no single evaluation matrix and each bottom-up stock picker has her / his own approach. Having said that, all successful bottom-up investors need to have a clear understanding of the financials and the business drivers of the company.
An in-depth analysis of the cashflows (how cash flows are generated and how they are deployed), the margin profile (Gross Margin, EBITDA Margin, Net Profit Margin), debt and its maturity profile, working capital cycle, asset turnover and capital structure of the firm would largely cover the financial analysis.
In terms of business drivers, the investor would need to look at the product positioning, growth opportunities, level of vertical integration, access to raw materials, efficiency of operations etc.
Lastly, the investor would also need to look at historical dividend payouts and buybacks to understand how the company rewards its investors.
Though investment purists would differ from me, I believe a sound understanding of the industry/sector in which the company operates is essential to being a successful bottom-up investor.
What should investors do when they face a situation when the portfolio stock falls say 40%? How should one evaluate buy or sell strategy?
Investors should avoid panic when a stock that they own falls sharply. They should try to understand the reasons for the fall and evaluate whether the market reasoning justifies the price correction.
If the investment rationale for investing in the stock remains unchanged and there is no deterioration in the fundamentals, investors can consider holding on to their positions.
They may even consider adding on to their positions, if they have faith in the long-term prospects of the company.
However, if the price fall is driven by bad performance, unethical conduct of management/promoters or there is a deterioration in the fundamentals, investors may need to book losses and trim / exit their positions.
What is your call on IT stocks for 2023? The voice is growing louder and the sector could turn out to be an outperformer
The outlook for the IT sector is cautiously optimistic. Most advanced countries are expected to face stagnation/recession during the next twelve months.
Companies operating in these countries will try to curb spending and their IT Budgets will come under pressure.
However, investments in areas like cloud migration, digitalization, deployment of data analytics, machine learning and artificial intelligence (AI-ML), virtual reality and augment reality (VR-AR), Internet of Things will need to be made by the companies to remain competitive.
Similarly, companies will need to make investments in cyber security and data protection. Hence order flow to the IT sector will continue despite the modest levels of IT budgets of their customers.
However, the pricing of new deals will come under pressure as their clients are like to be highly value-conscious. Further, inflation is adding pressure on their cost side, particularly manpower costs.
We are likely to see the EBIT margins of IT firms under pressure. We see the larger IT firms being able to navigate the challenges better vis-à-vis mid-tier IT firms.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)