Dalal Street Voice: Pharma, chemicals, EV & textile stocks trading at attractive valuations post recent fall, says Divam Sharma of Green Portfolio

Several companies across pharma, chemicals, Electric Vehicles (EV) and textiles are trading at exceptionally comfortable valuations post the recent correction, Divam Sharma, Founder at Green Portfolio said.

Sharma has over 13 years of experience in investment management in the stock markets. Green Portfolio, which has an Asset Under Management (AUM) of Rs 80 crores as reported to SEBI, aims at building an AUM of 1000 crores in the next 5 years.

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In an interview with Zeebiz's Kshitij Anand, Sharma said corrections are essential in the markets. During this phase, the fundamentals of a company are catching up to its valuations and it’s a character of a healthy market. Edited excerpts:

Q) Bulls have taken a back seat as bears took control and have been successful in pushing benchmark indices below crucial support levels. What is your take on markets?

A) This was a much-needed correction. Corrections are essential in the markets. During this phase, the fundamentals of a company are catching up to its valuations and it’s a character of a healthy market.

Despite being in an interest rate hike cycle, the corporate profit outlook remains optimistic, and we are seeing specific names coming marginally well below their intrinsic value.

Q) Crude oil boils to $130 recently. What is the kind of impact you see on markets, the economy, and India Inc?

A) If crude sustains at $130 and above, it will bear a severe impact on the economy. This would impact the Government’s budget to spend towards infrastructure development.

On the consumption side, a period of hyperinflation can take shape if crude oil prices continue to climb a leg higher which will result in consumers deferring their spending.

Subsequently, this will impact business volumes, margins, and the overall GDP growth rate for FY23.

Narrowing down on the effect on markets, a majority of listed entities are manufacturing companies.

A rise in crude oil prices will precipitate a short-term blip in gross margins for several entities as they will take time to pass on these costs to their end customers.

Even though the overall markets will remain buoyant, it will be a challenging period for many manufacturing entities that are operating at single-digit margins.

Q) Will rising crude oil impact earnings growth in the March quarter?

A) Absolutely. Earnings growth will be subdued for the next two quarters. A rise in crude oil prices generally raises the cost of most if not all raw materials.

Most of the businesses will find it difficult to pass on these costs to their end consumers in the short term which will result in margin squeeze and lower profit growth.

Q) What is the kind of impact you see on markets as well as reforms post-state election results?

A) The election results ensure continuity of leadership and more so as we see that strong leadership is the need of the hour in the current situation.

There is a huge geopolitical realignment, and the continuity of current leadership will ensure that India navigates and benefits through ensuring trade partnerships with leading economies.

Q) There is no stopping of FIIs as they have pull out more than Rs 18000 cr from the cash segment of Indian equity markets in just 3 sessions. What is the trend you foresee for FIIs amid the US Fed rate hike possibility and Russia-Ukraine war?

A) During the interest rate hike cycle, more often than not, we have seen FII’s flocking from emerging markets (EMs). This combined with the geopolitical tensions, there has been an overall rise in equity risk premiums in the emerging markets.

However, as the dust settles and capital gets reallocated from Russia, we believe Indian equity markets would be the destination for the FII’s going forward.

Q) Amid gloom and doom are there any money-making opportunities that investors can grab?

A) Certainly. This will be a stock pickers market going forward. The companies which have the ability to pass on the increase in input costs, comfortable double-digit margins, and those companies that have a strong management team with the capability to steer through times like these will continue to thrive and perform beyond limits.

As a result of this correction, we are witnessing several companies across pharma, chemicals, EV, and textiles trading at exceptionally comfortable valuations.

Q) Given the fact that the market is down more than 10% from highs – any mistakes (1-5) which investors should avoid making as volatility increases?

A) It’s the stock that has corrected 20% that goes on to correct another 50%. Investing in companies based on the reasoning that it has corrected significantly cannot be justified in this market.

Investors must remain focused on the fundamentals. Its margins, its ability to pass on the increase in input costs, and moreover the capability of the management to steer through.

Considering the volatility we are witnessing we recommend investors deploy capital into their portfolio in a staggered manner in the form of SIPs instead of investing in lumpsum.

Q) How can investors look at asset allocation (considering he/she is in the age bracket of 30-45 years). Is it time to reduce equity in the portfolio and increase the percentage of debt?

A) With inflation expectations now above 7%, debt instruments should not be considered as long-term investments.

Allocating a portion of your liquid cash to short-term debt ETFs would be ideal as the investor can reallocate the capital easily to equities if market valuations seem further attractive.

The goal of every investor is to protect their hard-earned capital above all else. Investments in real estate, commodities, or equities are the only asset classes that enable investors to hedge against inflation and grow their wealth in real terms.

Allocating a higher percentage to equities with a time frame of 3-5 years would be ideal given where the Indian economy and corporate profit scenario are heading.

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