Let us try and understand the market setup because we have been going on from strength to strength. There is that gush of liquidity, especially domestic liquidity, which is supporting the market. But of late, there has been this trend that largecaps and the frontline index has been doing better and the broader markets have been a bit of an underperformer. In fact, the likes of banks, etc, have made a bit of a catch-up. Do you think a churn is underway and now the next 12 months would perhaps belong to quality and largecaps and not really momentum?
Aniruddha Naha: We clearly believe that there is a bit of a slowdown in earnings which has happened in the last quarter and probably this current quarter would also see some amount of slowdown. Having said that, from a valuation perspective, clearly the quality end of the market and to a certain extent, the largecap segment still offers a reasonable amount of comfort in terms of valuations. We are hoping that post monsoons, you would start seeing earnings coming back. It will be a little more broad-based and that should drive the next leg of markets probably a couple of quarters down the line.
Capex seems to be one of the key themes of your investment thesis here. But if you look at the government capex, that has slowed down, in fact, it is down around 18 odd percent for FY25 so far and private capex has not picked up meaningfully. So, what are those green shoot areas that you are seeing on the back of which you are so much bullish on capex picking up going forward?
Aniruddha Naha: See, this financial year also saw the election results, etc. There was a reasonable amount of slowdown that happened. The monsoons have been strong this year vis-a-vis last year.
So, to that extent also, the capex activity comes off purely because of monsoons. The way we look ahead, I think the government’s focus on the investment cycle pickup will continue.
There is absolutely no two ways about it. I think incrementally also the kind of spends that we are seeing or the allocations going towards, let us say, defence, railways, and other capex-oriented cycles, the renewable part of it, I think this will continue.
More interestingly, what we really like about the private sector side is the balance sheets are very de-leveraged today. We have looked at the NSE 500 odd companies and beyond also. We have not seen such a clean balance sheet for corporate India for a very long period of time, that is one. And the second thing that we observe is the capacity utilisation has definitely picked up across corporate India. Today, for the first time probably, we have gone beyond 75% capacity utilisation across the NSE 500 and sector-wise. There are segments in the market where it is beyond 80%. So, you have got clean balance sheets and capacity utilisation picking up purely from a demand perspective. And if that happens, we are reasonably sanguine over a period of next two-three years, you will see the private sector capex side picking up. In fact, across sectors, whether it is cement, electronic goods, cap goods, pharma, textiles, logistics, chemicals, and a few more, we are seeing specifically, maybe not at a broad-based sector level, but company-specific levels we are clearly seeing companies going ahead and spending for the next three-five years.
Just wanted to get a sense from you, given the fact in your earlier answer you pointed to the fact that Q2 can perhaps see some further slowdown in earnings. Q1 as it is was not great. The valuations of the Indian markets are really punchy. What, 22-23 times in terms of the forward earnings. What do you then think is the best strategy right now in terms of the portfolio allocation, as well as what the realistic expectations should be there for the rest of the next 6 to 12 months from the markets?
Aniruddha Naha: I think that is a very valid question. What we are clearly seeing is we have probably upfronted a bit of returns in that sense. This year, FY25, will be a year where we have suggested to investors to take it as a year where you build portfolios. Do not expect too much of returns over the next six odd months or till end of financial year. I think the next financial year onwards, once we start seeing numbers come through in the December odd quarter, I think that is where probably the valuations will get justified by (8:49) earnings which come through. So, over the next two, three, five years will Indian equity markets deliver strong returns? We are absolutely positive on that.
I think this will be a year of consolidation where earnings need to catch up and justify where valuations are. Otherwise, what will happen is the markets could go through some amount of time correction and what we are seeing presently for whatever the markets are returning, it is largely expansion in valuations rather than earnings picking up.
We always like to invest into segments where we are clearly seeing earnings picking up and that is something that we are tracking very closely as of now. NSE 500, it went ahead and delivered earnings of less than 10% and that has been a little bit of a disappointment, frankly speaking, for the markets.
Given that FOMC outcome will be out today and rate cut is something which is pretty much expected by everyone on the Street and Indian RBI is also expected to follow suit. We do not know when, but it will as the Street expectations are. So, for say short term, which are those sectors that you are parking your money in and which are those sectors that you are avoiding for now?
Aniruddha Naha: The NBFC segment is something that we are positive on. The largecap good names out there and which have got a reasonable long track record of being listed.
We are definitely betting our money out there, that is one. But please understand, India generally across the corporate side and even at a personal level, Indian individuals, they do not carry too much of debt on their balance sheets, individual balance sheets, whether it is a corporate balance sheet or the individual balance sheets.
If you have a rate cut, it actually does not feed in too much into the reduction in the interest cost. So, probably if we have to bet on one sector, that would be the NBFC sector, where the cost of funds would definitely start coming off.
But generally, across any sector or any company which has a reasonable amount of leverage would stand out to be a beneficiary because you would see interest costs come down in those segments or those companies.
