The opportunity is very large in the defence sector. In an interview with MintGenie, Chirag Setalvad, Head Equities, HDFC Asset Management Co. Ltd opines that PSU companies should be looked at on their individual merit rather than clubbing them all under a common umbrella.
Your predecessor Prashant Jain had a strong faith in defence and PSU stocks. What is your take on the same?
PSU stocks should not be looked at as a homogeneous group. PSU companies straddle various different sectors like banking, oil & gas, utilities, defence, logistics, etc. and the dynamics of each of these sectors are quite different. Moreover, even within a particular sector, individual PSU companies vary significantly and can have very different profiles from a management, growth and quality standpoint. Thus, I think companies should be looked at on their individual merit rather than clubbing them all under a common PSU umbrella.
As far as defence is concerned, the opportunity is very large. The Government is looking to indigenize significantly over time. Hence the long-term outlook is quite encouraging.
The market rallied on August 30, 2022, unexpectedly. However, the market anticipates another interest hike in the near future. Do you think increased participation by domestic investors will impede the bear run unlike before?
In the near term, as we all know, sentiment plays an important role but over a longer period, it will be fundamentals which will determine the trajectory of the market. If fundamentals deteriorate materially, either within India or globally, markets could react adversely regardless of the extent of domestic participation. Having said that if retail participation increases sustainably it can lead to lower volatility compared to the past and in relation to other global markets.
The mid-cap index had retraced only 38 per cent of the rally from Mar’20 to Oct’21 in the last year’s consolidation and then broken above the channel which is very bullish. Would you advise new investors to opt for mid-cap funds for better earnings in the near future?
Post the recent rally, the Nifty Midcap 150 Index now trades at a premium to its ten-year historical average from a valuation (P/E) perspective. Hence, it is likely that returns, going forward, will be driven more by earning growth than by a further significant improvement in valuations. This excess valuation may adjust down over time but should not impact returns substantially if the investment horizon is reasonably long. We continue to advocate a staggered SIP approach to this category for investors with a long-term horizon and tolerance for volatility.
The IT sector seems to be in a consolidation phase. How long do you think it would take for the IT sector to outperform its peers?
The IT sector had rallied significantly and has subsequently entered a consolidation phase. Valuations, despite the recent correction, are above their long-term average levels. However, the overall demand environment remains strong. There is some pressure on profitability from rising employee costs though there are early signs that this may be abating. At the same time, cash flows are strong and payout has improved over some time. Thus, some premium in valuations to historical levels is understandable. We would prefer to take a stock-specific approach at this point.
Which sectors do you think will fire up Nifty in the coming few years?
Overall, I continue to find that banks are showing a good improvement in their fundamentals – falling NPAs, better capital adequacy and improving credit off-take. At the same time valuations are sensible. They are also well placed in an inflationary environment as assets tend to re-price faster than liabilities.
In general, the investment climate looks reasonable - the government is focused on improving infrastructure, corporate capex is showing signs of resilience and household capex (on housing) should improve. Thus, companies exposed to the investment cycle are poised to do well.
India has emerged as the manufacturing hub for the developed world. Do you think it will render inflation irrelevant for the Indian market?
Today, inflation is a challenge both in India as well as overseas. While inflation in India has risen, it is still at relatively manageable levels. More importantly, inflation in India does not seem to be sticky or entrenched which may not be the case internationally. Additionally, with commodity prices correcting there should be some respite both in India as well as overseas. Overall, I think that India is comparatively better placed. But, while that is relatively good news, it certainly does not mean that inflation is irrelevant. Rising inflation poses a risk to both demand as well as valuations.