Dalal Street Voice: India at cusp of an earnings and credit cycle; could hit $3 trn GDP mark this year: Rajesh Bhatia of ITI Long Short Equity Fund

Rajesh Bhatia, MD & CIO at ITI Long Short Equity Fund said India this year will be a US$3-3.5 trillion economy and will register the fastest growth in the world.  

Rajesh has over 30 years of investment experience in Indian equities; Last 14 years in Alternative Investments (Long-Short fund management). In his last assignment, Rajesh was CIO, Simto Investments, a subsidiary of Tata Investments; proprietary book.

In an interview with Zeebiz's Kshitij Anand, Bhatia said that India is at the cusp of earnings and credit cycle and therefore, if these inflation scares prove to be transient, then FIIs will have to come back to India and corporate earnings growth in double-digit will lead to the double-digit in stocks as well. Edited excerpts:

Q) The Russia-Ukraine war is showing signs of easing out and the impact is felt on equity markets across the globe as well. Is the worst over for India as well?

A) It is difficult to call the timing of the conclusion of the war. We must take into account that Russia is a large country and a significant exporter of Oil, Coal, Wheat, etc.  

The disruption to supplies due to the war or sanctions is having an impact on commodity inflation.  Therefore, the longer the war lasts or the more severe the sanctions, the greater the upward push to these commodity prices.  

Given that there already was an undertone of rising inflation, a long war or severe sanctions could prolong this problem. So, to conclude, it is difficult to say that the worst is over.

See Zee Business Live TV Streaming Below:

Q) The US Fed rate hike in March and the possibility of six more hikes could fuel risk off sentiment. Do you see the FII exodus intensifying in the coming months? They have already pulled out more than Rs 44000 cr from the cash segment of Indian equity markets?

A) There have been two views on the markets over the last few months. One is the FII view, which has been large seller in the Indian equity markets.  

Their view has been that India, while at the cusp of an earnings and credit cycle upturn, has incorporated this upcycle in the 16-18% CAGR earnings estimate for FY23 and FY24.  

And post incorporating the growth in earnings, the Indian markets were trading at 17-18x FY24 earnings, which has been at the highest band of its historic PE ratio.  

So, while earnings were adequately discounted, these valuations did not account for the potential rise in interest rates globally (particularly in the US to which Indian cost of capital is also linked) - note, as interest rates go up, PE ratios tend to decline.  

Further, the Indian market also did not account for the sharp increases in inflation which had the potential to hurt the earnings estimates as well. In effect, this led to their negative view on Indian markets and hence the record amounts of selling from FII.

On the other hand, the Indian investor has a more positive outlook on India. India this year will be a US$3-3.5 trillion economy and will register the fastest growth in the world.  

It is at the cusp of the earnings and credit cycle and therefore if this inflation scares prove to be transient, then FIIs will have to come back to India and corporate earnings growth in double-digit will lead to the double-digit in stocks as well.

It is difficult to call the trajectory of inflation and especially since the outlook is clouded by the Russian invasion of Ukraine (Russia is a large exporter of oil, wheat, coal, etc so a long-duration war or high sanctions would acerbate inflationary pressures and vice-versa) and the spike in covid cases in China (production stoppages in China could worsen supply chain issues).  

So, we expect the volatility in equity markets to continue in the short term as it navigates this inflation direction. The FII participation will therefore depend on how this inflation trajectory evolves.

Q) Moody’s downgraded GDP forecast for India while JPMorgan downgraded India to Underweight from Neutral. What do the stars foretell? Is there any historic reference?

A) Well, certainly the risks for India have certainly increased and those risks are front-ended. We believe the risks are front-ended and are inflation-related.  

Note, the primary reason why equity markets did well globally post covid was due to the sharp decline in interest rates thanks to the increase in liquidity by global central bankers and the sharp drop in interest rates.  

Any reversal in the interest rate trajectory could have a reverse effect on equity markets. What is unknown is the depth and duration of this interest rate hike cycle.  We will have the answer to these questions in the next few months.

Also, references to past cycles is not relevant.  Earlier when interest rates would go up, it was part of a normal business cycle, but here interest rates were artificially engineered by global central bankers.  So we may have to do some original thinking on the economic implications and trajectory.  

Having stated the above, if inflation were to cool off, India would be the best equity market in the world. And therefore, earnings growth in the double-digit will lead to double-digit returns from stocks as well.

Q) What are your top bets (stocks for FY23) and why?

A) We can comment on sectors.  We like the IT, Telecom, Insurance, private banks, and select consumer stocks from here on.

We are also likely to increase cyclical bets as we either get a better handle on inflation trajectory or if valuations decline for these stocks to make them attractive.

Regardless, cyclical are a part of our tactical portfolio which we increase or decrease depending on our short-term views also.

Q) The new age stocks took some beating in March and many are trading below issue price. Any word of advice for forthcoming IPOs and how should investors shortlist stocks for investment?

A) One observation is how few investors in India have paid attention to risk-return frameworks in the recent past.

At one end, high PE ratios are assigned to consumer companies with low long-term earnings growth trajectory and even weaker outlooks, and the other end, how early-stage digital companies were offered sky-high valuations even though the range of outcomes of their future cash flows was very high and uncertain.

Usually, the outcome of such investing is sub-optimal returns as the best case.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)