Tighter visa regulations, however, won’t be a big threat for Indian IT majors, he says in this interview. Edited excerpts:
The next 2-3 weeks are going to be action-packed for investors amid the ongoing Q3 earnings season, Trump’s swearing-in, the Fed meeting, and the Union Budget back home. What will your strategy be when volatility is likely to be higher than usual?
We will track these events if they have any relevance to long-term trends for the economy and capital markets. Our investment approach is less reactive to news events unless they materially change our view on a company’s business. We continue to favor high-quality companies with sound fundamentals and strong balance sheets. In all likelihood, such companies should be better placed to weather any disruption from the events mentioned above.
Do you think that earnings downgrades will come back in Q3 result season to haunt investors once again? What are your broad sectoral expectations from Q3 earnings?
Further earnings downgrades are a distinct possibility, especially among small- and mid-caps and pockets of the market where valuations are still stretched. Broad Q3 consensus earnings expectations are relatively better in telecom, real estate, and pharma. Lenders exposed to consumer lending could report muted numbers due to elevated provisions in unsecured loans. Consumer discretionary could be more of a mixed bag, with festive season spending partially offset by the cyclical demand slowdown.
While the consensus of brokerages seems to be in favor of large-cap stocks, a number of blue chips have underperformed in the last 2-3 years. Do you think the valuations of those bruised blue chips are attractive enough in 2025?
Nifty50’s forward PE is within the historical average and reasonable compared to the small- and mid-cap space. Looking at broad valuations, there are pockets of opportunities within large private banks and perhaps even the life insurance space, where you can find well-managed companies with strong fundamentals. The Nifty private bank index has lagged its PSU counterpart, and the valuations of most large private banks have derated over the last 5 years. On fundamentals, larger banks have no major credit issues and are generally well-provisioned for any contingencies. Most private banks are growing their market share. At a more fundamental level, the growth of large private banks is tied to GDP growth, so if we are expecting the economy to grow at 10-12% nominally over the next decade, private banks should at least grow at a similar pace, if not faster.
Given the Street’s low expectations from the Q3 earnings season, do you think that Nifty’s current valuation is reasonable enough to limit a large downside unless it is triggered by a shocking external event?
I don’t think there should be a large downside from current levels, at least for Nifty. However, select stocks could likely see sharper drawdowns due to the derating of valuation multiples.
What could be the impact of Donald Trump’s presidency on Indian equity markets? IT is being seen as a winner but there is a threat around tighter visa regulations. Which Indian exporters are likely to get impacted negatively from Trump rule?
Some of Trump’s campaign signature promises, such as tariffs and immigration control, if implemented, could put upward pressure on inflation and treasury yields, possibly affecting capital flows into India. Having lived through the first Trump presidency, many Indian IT firms have reduced their reliance on H1B visas by increasing local hiring, expanding nearshore delivery centers in Mexico and Canada, and strengthening their offshore presence. Therefore, tightening visa regulations should not be a big threat, at least to IT. On the other hand, given India’s geopolitical status and good relations with the US, we should not be at a disadvantage under a Trump administration. In fact, if the stated intention to increase US fossil fuel production goes through, lower oil prices could be a net positive for us.
What are your expectations from the Union Budget from a capital markets perspective?
With tax collections growing at around 9% YTD and the government committing to reducing the fiscal deficit to about 4.5% of GDP by FY26, it is difficult to envision significant growth in government capital outlay in the upcoming budget. There could be additional funding for PLI schemes, which have gained traction in certain industries. There is also a case for correcting some of the tax disadvantages for debt products versus equity. The debt capital market will be an important funding source for corporates if private sector capex is to pick up.
The capex theme slowed down after the Lok Sabha election results were declared in June last year. Is there a play in rail, defense, and other capex stocks in the run-up to the budget, or do you think investors are more likely to be disappointed?
I think I’m likely to be disappointed given the constraints on government fiscal spending. Also, markets could be more focused on the delivery of earnings growth from the execution of existing projects for these stocks.
Following the correction in the market after the September-end peak, which sectors have become attractive from a valuation perspective?
Select FMCG and consumer stocks, which are affected by the ongoing demand slowdown or elevated competitive intensity, look attractive if one takes a longer view and expects consumer spending to eventually turn around. Our strategy will continue to remain stock-specific, focusing on clean, well-governed franchises with earnings visibility and reasonable valuations. The number of such good-quality, long-term compounding stocks has underperformed over the last 4 years, even as value stocks have outperformed. Our investing style remains sector- and theme-agnostic, though.
