Buy every dip; FII flows will pivot back to India from China: Harendra Kumar

A very cautious mindset seems to have gripped the Indian markets but the reality on the Indian economy front may not be as bad from the fundamental standpoint. How are you looking at the factors at play?
Most guys on the market were actually very circumspect on the rally. It was a doubters’ rally and most of them have been left out and have been on the sidelines. So be it the banks or the PSU banks, not many institutional investors have participated in that rally.

Also the liquidity or the buying ammo of retail investors seems to be waning. If you ask me, there is no doubt or no challenge in terms of fundamentals but it is only a liquidity event that is underway at the moment. In its own way, the market will recover once people come back from the holiday season.

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I personally am quite bullish on the liquidity outlook for the next full calendar year plus financial year. I expect that the borrowing programme of the government in the Budget will be a positive surprise. Secondly, we will see more traction on India’s inclusion in the bond index. Third, with inflation tapering off, the rupee outlook will also improve.

So with these three events, FII flows will pivot back to India from China and this could have major tailwinds for the largecap stocks.

You are in touch with institutional clients on both the FII side as well as DII side. One fear which is in the market now is that last year the big selling from FIIs got absorbed by domestic investors. Will domestics stand up again and absorb if FII selling continues?
It is indeed a legitimate fear. If we analyse the mutual fund flows, we will get around 20-15% growth which is the SIP money and the incremental money that is coming into the industry.
The second leg of FII selling will come and there will be some damage. It is more important to analyse where the damage will come – banks, autos, or some other sectors. In my view, the flow of money came in significantly higher in the tech index and there is significant overvaluation in that space even today.

So if you analyse the Nifty PE, there is a lot of overvaluation in terms of growth and the cost of capital resides in the tech index. If we see US entering recession and the growth numbers for the Indian IT companies actually tapering down, given that they are significantly over owned even now, one could see sharp gashes out there. So yes, we have risk in terms of FII outflows and within that, flows into a specific sector which is technology.

You also started getting positive about domestic economy related sectors ahead of everybody else. How are you playing the domestic economy-related stocks or pockets – the capital goods, banks and some other domestic consumption kind of plays? Did they also get a little expensive on the higher side and hence are open to some correction?
If you look at the top 85% of the Nifty, which is the big economy, there are two parts– one which is expensive and that is tech. Private banks like

which is 2.2. is closer to book. There are private as well as public sector banks which are cheap. Automobile stocks are at 14-15 PE.

So there is a significant value divergence in the Nifty. We are not worried about valuation if you position correctly. Two big events are going to happen from this Budget.

Number one is India’s revenue expenditure is going to move slower than its revenue accretion. This is a big structural movement which gives phenomenal elbow room for the government and phenomenal fiscal space to go out and spend. If you look at Rs 2 lakh crore as the investing incremental spend the government will do, unless it is all towards infrastructure where there is 5% net profit margin which means that Rs 10,000 crore of PAT to the infrastructure and capital good names can give it multiples of 15 times.

There is significant market cap multiple to be added to some of these names. So, the incremental story is going to be capex which moves away from domestic consumption and it also works the productivity levers in the economy. Corporate profitability to GDP will see an incremental uptick from here progressively over the next three to four years and that will be the key driver. So yes, sectoral allocation becomes a play. Economic construct only will get stronger not weaker.

What are your overweights and underweights in terms of your model portfolio?
I think banks will have significant headroom for growth even from here. Again, within that, the pecking order needs to change. Number one, two big events will happen in this year; one is of course

Bank’s repricing given the recalibration in terms of the indices which probably go off.

Second is the continuation of the capex cycle into credit growth for some of the PSU banks. So some recalibration in the private names and significant overweight on PSUs will work well. Third, of course, in automobiles, we have seen selective plays rerating. But I think the momentum with chip shortage, raw material inflation and greater consumer spending automobiles will tend to do well.

The area where people are missing is energy. We are significantly positive on the power space – be it

, , or for that matter PFC, . The whole energy ecosystem which we call new energy is showing a fresh wave of investments and there is significant value out there as well. So these four areas will significantly beat benchmark indices for the current financial year.

What is happening right now in the market seems to be that we are catching up with the corrective moves around the world. Every other market in the world had corrected quite a lot from their top, we were 2-3% near at an all-time high. So maybe some mean reversion is coming but from current levels what is the likely scenario for benchmarks? Will they be 5% lower from here, 10% lower or even over 10% kind of fall is not ruled out?
I think every dip should be bought into – be it 5% or 7% because the risk reward is favourable. We have three large events next year. One is the HDFC Bank merger will be over; we will have

which is significantly under owned and the reversal of flows, which is more inflows coming into India.

So to expect a 20% plus from whatever levels we close at maybe in January is not an unreasonable expectation. Even the price behaviour on the Nifty now is a very slow bleed, it is not a sharp capitulation. That gives us a lot of hope that this very mild liquidity driven event will have more upsides than downsides as possibilities.