EXCLUSIVE | Global uncertainty could aid India; healthcare and auto look promising; IT a contra bet, says Anil Ghelani, DSP Mutual Fund

The current market valuations look attractive, and there are select pockets in the mid-and small-cap space that offer lucrative opportunities, says Anil Ghelani, CFA, Head–Passive Investments and Products, DSP Mutual Fund, in an exclusive interaction with Zee Business’ Swati Verma.

On Q4 earnings, Ghelani said it was a mixed bag, with some instances of downgrades in certain stocks and sectors as well. Overall, there has been a downgrade in earnings growth for Nifty50 of around 4-5 per cent. Hence, the broader estimates that people were having that Nifty earnings would grow around 15 to 18 per cent seem a little aggressive at this juncture, he added.

Anil Ghelani has been working with DSP Group since 2003. Previously, he was CIO at DSP Pension Fund Managers. He has also worked at IL&FS AMC and at S.R. Batliboi, a member firm of EY. 

Edited excerpts:

The benchmark indices are flirting with all-time highs. FPI inflows hit a nine-month high in May, the GDP print blew past expectations, and GST collections continue to be robust; can we say that India is in a multi-year high cycle? Tell us in detail.

I won’t say it’s in a multi-year high cycle, but it’s definitely in a good cycle. I assess markets with the CFE framework, where C stands for corporate earnings, F for flows, and E for event risks. Let’s take each component one by one. First, corporate earnings. If we look at the last 19 months, i.e., from October 2021 to the present, the Nifty50, or broad market, has remained largely range-bound; however, corporate earnings during the window have risen sharply. For instance, around 2021's end, the earnings per share (EPS) of Nifty50 companies were at Rs 650 levels, which have grown to Rs 850. In percentage terms, the Nifty EPS has increased by 30 per cent during the period. Now, because of this, the price-to-earnings (PE) or valuation of Nifty50 has come down from around 28 times to around 21 times, which makes the market attractive as an investment per se.

Now, let’s understand the F part, i.e., flows. Foreign portfolio investors (FPIs) have turned bullish on India, as we have witnessed some healthy inflows in the last few months. Last year (CY2022), Indian equities witnessed outflows worth 15 to 16 billion dollars. However, this year, the scenario could be different, as there have been inflows of around 5 billion dollars over the last 3–4 months.

Moreover, if we look back around six months, Indian equity markets were trading at around a 90 per cent premium to their peers in other emerging markets. However, as of today, the premium has declined to 45–50 per cent, which is closer to the long-term average. Due to this, FPIs are getting attracted to India.

Besides, GST collections and other high-frequency indicators are steadily improving and are pointing towards good growth, even though certain global markets are not so positive. Thus, FPIs will once again be expected to see India in a positive light.

Finally, the last part is E, which stands for event risks. There is certainly a big risk if suddenly something untoward happens or goes wrong in an unexpected way due to any geopolitical tension or side effects of the sharp interest rate hikes, as it could result in an unexpected outcome.

What’s your view on the mid-and small-cap segments?

Mid- and small-cap stocks have seen a relatively longer period of consolidation or undervaluation. Hence, I believe that it can offer some attractive opportunities, but only in certain pockets. It’s not that kind of market where everything in the mid-and small-cap space will keep rising. That happened in certain periods and could happen in the future as well, but in my view, maybe not in the current situation. It is so because a lot depends on the capital flows in the companies and how these companies' earnings profiles will be impacted. It is quite obvious that not all companies will be able to sustain themselves in a very good way, and not all companies will be able to raise capital for their growth. Therefore, in certain pockets, there will definitely be attractive opportunities.

Will global uncertainty play spoilsport to Indian equities?

As mentioned earlier, it is important to keep global risk events in mind. Let’s assume that even if there are no unexpected risks like a geopolitical crisis, there is still a global growth risk. At present, many European countries have already declared that they are in recession. In the US, too, there is a risk of recession. Hence, it's a risky event for Indian markets too.

That said, there's another angle to global uncertainty. In the last 2-3 years, there has been a question about the stability of many economies, like Russia, Sri Lanka, and most recently, Pakistan. Global investors have suffered massive losses, either due to geopolitical conditions or economic fallout. So, if something unfortunate happens in Russia, Pakistan, or Sri Lanka, then FPIs would have one or two countries less to keep on their radar and maybe increase their allocation to a country like India where there is economic stability, a stable political regime, and a domestic consumption-driven theme. There has been structural growth here. So, in this scenario, it could result in a good opportunity rather than an adverse situation.

What's your view on the fourth-quarter earnings season? What's the one key takeaway from it?

March quarter earnings were a mixed bag. There were some instances of downgrades in certain stocks and sectors as well. Overall, there has been a downgrade in earnings growth for Nifty50 of around 4-5 per cent. Hence, the broader estimates that people were having that Nifty earnings would grow around 15 to 18 per cent seem a little aggressive at this juncture. On a prudent basis, 10–12 per cent corporate growth is a more likely scenario because, as mentioned earlier, in the past 19 months, the Nifty has remained range-bound, but earnings of the Nifty companies have grown about 30 per cent over this period. Hence, there has already been impressive growth.

What investment strategy would you suggest to people looking to invest in equities?

The current market valuations look appealing. In the past 19 months, the market has not gone anywhere, but earnings have increased. Now, certain specific pockets or sectors have the potential to grow. For example, look at mid- and small-cap space. If there is a good focus on quality stocks in mid- and small-cap stocks, it will definitely be very useful. If one is trying to build a strategy to invest in equities today, a prudent mix would include some allocation to large-cap stocks.

However, if one doesn't prefer stocks, I believe they should invest in mutual funds, which are a broader pooled vehicle. For large caps, I would suggest low-cost index funds or ETFs. For mid- and small-cap stocks, allocation in good-quality portfolios whereby one could get a mix of allocation into mid- and small-cap stocks would be a wise decision.

If someone's risk appetite is a bit higher, they can go for a particular sector or thematic funds.

Sectors you are bullish as well as bearish on currently and why

First of all, I am bullish on healthcare. This sector has been undervalued for quite some time, and there is a high chance that it will gradually see a good recovery. Another theme that looks promising is auto and auto-ancillary. Across the board, passenger vehicles, commercial vehicles, and ancillaries are in good shape. The demand these companies are witnessing is encouraging. Just a couple of quarters ago, there was so much noise around electric vehicles (EVs) that they would pose a serious challenge to traditional, established companies. However, nothing of the sort will happen. It must be noted that these established companies, which have a pan-India presence, are also making significant investments in infrastructure and research and development (R&D) for EVs. But as a measure of their balance sheet and their size, it's small. So, it's not very visible. Now, given this scenario, what would be the ideal choice for the majority of people? How many people will prefer a newly launched company, a sort of startup with big advertisements driven by one or two people who are promoters, to a traditional, well-established company with a wide service network, among others?

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The third sector, which is a contra bet, is IT, as everyone is bearish on it at present. In recent times, the sector has seen a sharp correction and has been out of flavour. Many people are negative about it, but structurally, I believe that at current levels, valuations are approaching average multiples, and many companies appear financially healthier and relatively cheaper when compared to their global IT peers. Certain stocks may have a little bit of downside, but on a broader level, it would be a good sector from an investment point of view to bet on a turnaround in the medium to long term.

On the other hand, I am a bit bearish on select banks, non-bank financial companies (NBFCs), and housing finance companies (HFCs) because they have done very well in the recent past. So, there could be some saturation or contraction in the space now.

Passive investments have gathered pace of late; how do you see this?

Not of late, but over the past five years, it has been rising steadily. Today, ETFs and index funds account for close to 16 per cent of the entire mutual fund industry. The world over, this number is about 10–12 per cent. So, India has outpaced the world in terms of percentage. Of course, not in absolute terms, as the Indian market is much smaller, but I believe this is bound to continue rising. By 2025, there are various analysts’ expectations that ETFs and index funds will account for 25–30 per cent of the mutual fund industry.

The reason why people are choosing passive funds is not only due to the cost element but also due to various other factors, such as a recent couple of years of performance history in which many active funds have not been able to outperform the underlying index. I strongly believe that for large and midcap types of allocations, one should definitely consider using passive mutual funds. One can use it as a core allocation in their strategy, and for satellite allocations or for investments where you need regular inflow and outflow, you can use active funds. So, as a complementary strategy, it has started finding a place in everybody’s portfolio, whether it is retail investors, large family offices, or even large institutional investors. Everybody is tracking closely and investing in passive funds.

Some newly listed new-age companies reported decent performance in the March quarter. What's your take on these companies?

Among new-age companies, few have grown from being privately held to entering the listed space. Some of those companies have yet to create a proven business or revenue model that will result in gains or profits. Therefore, it’s challenging to assign valuations to certain companies. Let’s take an example of, say, a fintech company, where one feels it is a technology company and tries to value it like a tech company, but it should not be forgotten that at the core, it is a finance or lending business. So the risks of an NBFC that is in the lending business also need to be incorporated. Hence, it's difficult to give a view at this stage.