We will continue to buy from 4 sectors in mid to long term: Varun Goel

What do you think of the way markets are behaving now? Do you think brave buying, value buying as well as averaging is happening?
Broadly what we are seeing is that several small and midcap stocks are down 20%, 30%, 40% and 50%. Some value is beginning to emerge but the fact that crude is at $120-$130 a barrel could lead to the concerns for India as far as inflation, current account deficit, fiscal deficit and the rupee situation are concerned. One has to keep those macro variables in mind and some kind of earnings downgrade might happen if crude oil price stays at this level, So, one continues to hope that crude oil prices come down. once the military operations are over and things get back to a stable state pretty soon.

You must be analysing a lot of data points over the days and are also looking at historical evidence. It is not the first time that a military conflict is taking place in the world. All eyes are on crude and if crude remains elevated beyond a month or two, then the real damage starts coming in. Do you think India may be able to manage up to $95-100 odd average crude price for the year?
At $80 a barrel for crude, India’s import will come out around $150 to $160 billion in FY23. Now if the number is $120, then the import will increase by as much as $70 billion. So one hopes that once the military operations are over and if crude stabilises at $100, even then, we are looking at $25-$30 billion of additional money that India has to pay for its energy requirements, which will need to have some kind of impact on interest rates and inflation.

A lot of companies will see an increase in raw material prices – be it FMCG, auto or some of the other sectors which require imported raw material. Some of those things will have an impact.

Of course the companies with pricing power, which are able to pass on these things should be protected but we might see some pressure on margins continuing in the foreseeable future.

The correction that is happening is 21-22 times one year forward for benchmark became 18.5 times one year forward and the midcaps have also corrected. Is this margin compression still not fully in the price because everybody knows that commodity prices have shot up and at least for two quarters in a row, margins would be under pressure?
Our preference would be sectors which are export-oriented like IT and pharma. Telecom sector would probably offer the best earnings growth in the next couple of years. Select private sector banks should be able to pass on an increase in interest rates to their customers and they should also be okay. There are certain sectors which should be able to take care of the immediate challenges and as such, earnings growth in them remains largely intact.

Those are the pockets where we would like to continue to buy from a medium to longer term perspective. In the short term, certain sectors – be it consumer facing companies or automobile companies, might face pressure on margins.

Also, there has been some pressure on rural demand and some of the companies might find it difficult to pass on the full extent of raw material price increase because the demand itself is soft. So they might be caught in a loop where there is a soft demand and at the same time, increase in commodity prices. So both revenue and margins could get impacted.

If I were looking at some data points that the benchmark fall and even the broader market fall has actually been masking the real damage in the benchmark components itself. There are stocks which have fallen 25-30% and broader markets have seen on an average 30-40-50% correction. So, as values become so attractive, flows will come irrespective of anything else. Do you believe this argument may happen from here on?
There are several stocks, especially in the mid and the smallcap side. which are down 30-40-50% and even more and therefore value has begun to emerge. One can selectively start buying. What has happened is that in the last 18 months, we had a one-way rally with a lot of foreign inflows and a lot of domestic money coming in at the same time. The earnings outlook increased or improved materially.

Now, we will enter a period where there will be selective stock picking, in fact, lots of scope to do bottom up stock picking. One has to identify stories where the earnings growth remains largely intact in IT, India focussed pharma companies and select chemical names. Real estate companies continue to do well and these are some of the sectors where we continue to do bottom up stock picking and we believe a lot of value will get created over the next two to three years.

What about flows, how are the flows to your funds in the last six to eight weeks? How are you advising your investor fraternity? Are you getting top-ups?
What we have experienced in the last couple of years is that unlike five or 10 years back, where the domestic investors used to get very worried on every correction, this time with better investor awareness, we are seeing investors continuing to look at entry opportunities to average out their investments. We believe this trend will continue. And as far as the HNI investors and the domestic money is concerned, it should continue to pour in in a healthy manner.

Does this increase the probability of positive returns 12 months far out?
Definitely, some bit of froth has definitely been cleared and investors would have a much better entry opportunities and this is a great time to start building a medium to long-term equity portfolio. If you spread out your investments in CY2022, between now and the end of the year, investors should be sitting at very healthy compounding over a period of next five years.