Valuations | Chirag Setalvad: Valuations have moderated enough to have reasonable return expectations: Chirag Setalvad

But valuations are starting to change. There was a time when a lot of these businesses would trade at low double digit multiples and that is now changing and valuations are moving up. It is not across the board but it is certainly moving up and this is probably even more so on the private sector side, where valuations have certainly moved up. One has to be a little bit careful because there can be hiccups along the way but my preference is more for some of the public sector undertakings. There was a lot of visibility from a revenue standpoint. The valuations are also quite sensible and in that sense attractively placed.

ET Now: Some of the apparel exports from India are going up. They got hit because cotton prices went up but they have come down. Do you like that end of the textile space or do you like branded retailers catering to the domestic demand?

Chirag Setalvad: The branded retailers are quite expensive. It is quite a bit of courage to own those businesses at these valuations; so we have avoided those. The focus in our funds is to avoid businesses which are sort of extremely expensive despite the fact that they may be extremely high quality. So I would say that possibly you would find us more interested in some of the garment companies, there the valuations are a lot more sensible.

Do you have any of the property developers in your portfolio? Or do you like the housing finance midcap companies or even cement? How do you play the real estate sector?
One does not have to play real estate directly through a real estate company. There are a lot of ancillaries which go into it. One choice is to buy real estate company but you can also buy into a plywood company, cement company, finance company. One has to pick and choose because valuations are important to keep in mind but some of the midcaps which play into the real estate are quite well positioned and we own those in our portfolio.

Inflation seems to be peaking out. Do you expect the market to normalise in the next six to eight months? Valuations got compressed because of the rising trajectory of interest rates, inflation coming in and hitting the margins of corporate India. If this normalises, then the valuation argument will completely change on the upside. Doyou see that play out over the next 6 to 12 months, apart from earnings?
We have to keep in mind that we are in a general environment where there is going to be quantitative tightening and while that may ease towards the second half of next year, valuations have normalised and valuations are reasonable today. From an investor standpoint, we are not in an environment where valuations are expensive and hence returns could be compromised. But at the same time, we are not in an environment where valuations are cheap and hence returns are going to be outsized, being close to historical averages which means that one should have reasonable expectations of returns going forward.

There are a lot of uncertainties out there and while interest rates and inflation may have peaked out or may peak out sometime in the next sort of six-nine months, there is a lot of uncertainty still on the demand front. It is difficult at this point to gauge how much demand will compress, India is relatively better positioned but what is happening outside of India and the US and Europe, etc. It is still very difficult for us to gauge how much will be the demand compression? I do not think we are out of the woods from a risk standpoint, but valuations have certainly moderated to levels where one can have a reasonable return expectation.