Growth at reasonable valuation? There’s truck loads of money to be made: Manish Jain

What are you telling your clients as swift moves are coming into the market?
One has to understand that while a lot has happened in the last two, maybe three months, broadly the sense that I get is India on a standalone basis is still going to be far better placed as compared to growth versus valuations and the risk from inflationary perspective as compared to the rest of the world.

We are already seeing inflation at around 7.9% in the US and we are seeing it at a multi decade high in Europe as well as China. We are seeing how growth is slowing down in a lockdown kind of a scenario. Even if one assumes the whole impact, in a worst case scenario, we are still looking at a 7% plus kind of a GDP growth rate. We are still looking at realistic double digit earnings growth coming through in Nifty from a FY23 perspective.

Where we are standing today, the risk versus reward multiples versus the earnings profile and sustainable earnings profile on a PEG basis are still very attractively priced at less than two times price to earnings growth. That is essentially the reason why I think we as a house would continue to be very favourably inclined and bullish on equities. If you have a two-three-year investment horizon, this correction that has happened is a golden opportunity to get into a long position from a two-three-year perspective. There is a truck load of money to be made.

Which are the sectors you would look at? When I look at the gainers and losers last year, the so-called famous tech names would have given you losses but the good old heavy manufacturing industry names like L&T and heavy asset companies would have given decent returns. Should one stick with old tried and tested names?
No, I think CY2022 is going to play out very differently compared to CY2021 where we saw cyclicals rallying the way they did and structural growth sectors like FMCG and pharma underperformed. In FY2023 or CY2022, for me the number one theme that I would want to play is going to be financials. If project financing is going to come back, if private sector capex is going to come back, we will see the trajectory of loan growth continuing to improve.

The credit growth trajectory has already come a long way from 5-5.5-6% range to closer to high single digits now. It is a matter of time before it touches into the low double digit trajectory. We have seen the way asset quality has improved, we have seen the gross NPAs have reduced and the way provision coverage ratios have gone up in the last few quarters, private sector banks is going to be one space which I am going to be very positively inclined towards.

The second sector which I am going to be pitching in for is going to IT services. The way the currency is behaving plays out in its favour. But more importantly, the growth profile continues to remain intact. And with the correction that we have seen so far this calendar year, this sector will be favourably placed compared to what it has historically been.

The third sector is discretionary consumption. We are expecting discretionary consumption to remain very strong from the next couple of years’ perspective. So we are underweight on staples, overweight on discretionary consumption, IT services and financials. That is broadly the way I would play out equities in 2022-23.

We have not seen such hyperinflation in commodities before. Do you think markets have digested it well? Do you think the major move in oil prices and other commodities like wheat, corn will be a risk that one has to look forward to?
Yes and no both. There is a little bit of a worry that I have in my mind from a China perspective. Even though the number of cases in absolute terms in China are not very significant at 5,000-5,500 per day, but the fact matter is two broader regions are under lockdown and that essentially means that from a container freight rate perspective, the situation can incrementally worsen quite significantly.

That is going to be one big fillip as far as global inflationary pressures are concerned and to a certain extent, India is not going to remain insulated from that. That is where a lot of moderation has happened in my earnings expectation. Two months back, we were expecting between 17% and 19% earnings growth for Nifty in 2022-23.

Realistically we are looking at 11-13% band today and there is at least a 5% cut. A large part of that impact is going to be frontloaded which is going to happen in Q1 or thereabouts before settling down. But when one looks at it from the perspective of growth versus inflation, India is still fairly well placed in comparison to some of the other economies in the world, especially the developed part of the economy like Europe or the US.

In the US for example, inflation is closer to 8% levels and seems to be heading towards 10% for an economy that is expected to grow at one-fourth the pace. But India is still expected to grow at a higher pace in terms of GDP growth rate as compared to the prevailing inflation rate in this country. So even from a policy rate perspective, it is 6%. We are about negative 200 bps as compared to the US which is closer to negative 750 bps.

So we are much better placed in the global context and the correction in the market right from the peak, despite the bounce back in the last couple of days has been largely factored in. Unless something goes wrong very dramatically at this juncture, the market is not going to be reacting too negatively.

How would you look at things? Would you look at correction in some of the names where FIIs are heavy weight and correction has been high because they are compulsive sellers? Is that the space to watch out for?
There are two things that I am going to look at. One has to realise that in the last 10 years, we have paid 18-19 times multiple on an average for a 6% Nifty earnings growth. Now today, we are paying the same multiple for 11-12 times earnings growth. So obviously from a value perspective, we are much better placed today.

But what is also happening is that the dynamics of the market are undergoing a paradigm shift. The focus is shifting away from what earlier used to be sensitivity towards multiples to sensitivity towards growth. Wherever there is going to be a question mark on growth, no matter how slight it is going to be, the punishment is going to be disproportionately large.

We have seen that in IT services companies, so far in this calendar year, when one looks at the correction versus the numbers from a Q3 perspective, the punishment has been disproportionately large. If I am going to be building a fresh portfolio today from FY22-23 perspective, then focus will be on two fronts; I am going to choose stocks where I believe the risk versus reward is evenly balanced or more in favour of reward, which essentially means that either the growth outlook has improved or a significant correction has happened in these stocks.

The second thing that I am going to be very cognisant about is the growth panning out versus the expectation. Wherever there is going to be a question mark on growth, those are going to be the sectors where it is going to get hammered very badly. These are the two things that I am going to be very careful and cognisant about from a portfolio building perspective as far as the Indian markets are concerned in FY22-23.

So basically you think that value will outperform and only companies where growth is available at a reasonable valuation will do well, not growth at any price?
That is a beautiful summation of what I was probably trying to put across. We have seen a massive bull run in the last one, one-and-a-half years and we have seen pretty much all spheres of the market perform – value, growth, quality, non-quality. There has been a very significant bull run from Nifty at about 8,000 when the pandemic started to closer to 18,000 plus. That easy money making opportunity is now very clearly behind us and incrementally one has to be very cautious about quality and risk versus reward. The money making opportunities are going to be plenty but a high due diligence is needed and it is not going to be as easy as it has been in the last 12 to 15 months.