The Nifty is down more than 2000 points from its September highs. Do you expect more correction to come in or are the valuations now looking attractive? How are you reading into this fall in the markets? What could have been the reason? What could be the reason for the Nifty to consolidate at these levels? What are your views when it comes to the Indian markets?
Shreyash Devalkar: So, yes, we have seen that Indian market correcting, especially in last month, multiple factors has started affecting it. First and foremost, obviously, the valuations we have observed has been high in India. And when we say high, it is in the context that in across sectors, it is at least almost 30% to 200% higher than pre-COVID level as far as valuations are concerned, barring probably private sector banks, everywhere else this was observed and so that is actually the one point which has led to this correction.
Apart from that, when it comes to the growth as such, whatever we have observed, there is a deceleration in earning growth, which is observed in the recent results as well. The extent of which and how long it will, it will further lead to the earning cuts that is also on the back of investors mind, which has translated into this correction. Thirdly, there are some global factors as well that what is the trajectory of China’s stimulus, so that has been one of the key factors, which in the last year, when some of the FIIs might have thought about China also as an investment class. But after that, again, China has corrected as well.
And lastly, the US election ahead and the rate cuts, deficit. So, there are multiple elements to it. It is not only about one element as such, because of which we have seen again a huge outflow of FIIs in the last one month, it is upwards of $15 billion and that kind of outflow definitely would lead to this kind of correction. Going ahead, as far as the largecaps are concerned, absolute valuations, as I said when I said that the valuations are higher at least by 30-40% to as high as 200% across various sectors.
When it comes to Nifty or the largecaps per se, I would say that the valuations are reasonable. They are not way high the way it is in the mid and smallcap space. So, small corrections what we are seeing now, this leads to a reasonable valuation in many sectors. So, in the largecap, I think valuation is a lesser concern, there actually the bigger concern is the growth, because the growth is where if you see FMCG growth, mid-single digit; IT growth, mid-single digit; banks, again around single-digit growth or at least around 10% kind of growth, largest some of the companies, they are again around that 10% growth. The growth is the bigger concern in the Nifty rather than valuation.
You did mention multiple reasons why or what led to the fall in the market, but the key question here is how much more can it fall? So, how long do you expect this consolidation phase to continue in the market and amid such volatility and such market mood, how are you deploying your funds and where are you deploying your funds?
Shreyash Devalkar: So, such times actually for us and investors are relatively one would consider as actually there are good times to deploy and invest and rethink about the strategies. When we look at the way market has corrected, it has corrected across, actually the largecaps have fallen broadly equivalent to mid and small and it is not that the market is correcting only in the largecaps per se or only in the mid or small per se. So, what we are looking forward to in this correction is earning growth definitely for next one to three years, that is the first and foremost criteria. And apart from that, really high valuations where there may be some earning disappointments because the expectations are too high, so such places we are trying to stay away from and if you just go by the recent results season and what we have observed in the recent results season, the financial services, especially the private sector banks have shown decent results and expectations are also not that high in that sector. IT has shown, though the absolute growth numbers are slow, but at least they have bottomed out as far as the earnings are concerned. In case of healthcare as well, the valuations are not relatively high. These are the some of the factual observations one can have. While in the sectors like consumer, etc, we have seen some disappointments in earnings.
I just wanted to understand a bit more about the sector that is actually lagging sharply in trade today with the rest of the market and that has to be the auto space. Though, we have seen a decent October dispatches numbers, but the trend for this entire space has been pretty weak of late. What are the triggers that you think that one should watch out for in case there is supposed to be a turnaround in the auto space?
Shreyash Devalkar: Auto space obviously always has been cyclical and there is no denial on that fact and it is not only one auto space, actually there are multiple sub-segments into it. If we look at some of the segments like say tractors, actually the tractor growth has been good and some of the companies which reported their numbers, they highlighted that they are seeing some improved macro as well as the better monsoon condition, so that space has seen good numbers in this recent past. When it comes to CV, then CVs that number is not growing as expected especially considering the infrastructure and other activities in India, the better road condition, that number definitely is disappointing. So, when it comes to auto outlook, we are taking individual segment wise approach rather than the overall auto per se.
So, the segments where if you say now take the PV space, now the passenger vehicle space has been slowing down and has been slow always. There that SUV trend or the companies which are benefiting because of their superior product launches, so these are the two things one need to watch out for in the PV because overall PV growth has been slow. There was never an uptick per se. It was only SUV and a few product launches driven growth has been the success factor in this industry.
And when it comes to two-wheeler, now two-wheeler is a classic cyclical. So, here what we have seen is the penetration levels are high in two-wheeler and that has been the case not now, it has been the case even a decade ago. So, here this industry has gone through slowdown and again it has come up in last one or one-and-a-half years when it comes to the volume growth. After this sharp uptick recently, there are certain signs of slower growth compared to what it has shown in last one, one-and-a-half year because of the lower base in the years prior to that. Here this industry one need to test for the cyclicality by observing numbers closely month after month.
And when it comes to the financial space, where is it that you are seeing most value? Is it the PSU banks, private banks, NBFCs or the capital market ancillaries?
Shreyash Devalkar: So, as far as value is concerned, value definitely as I commented earlier is that the private sector banks have not got re-rated on a 10-year basis as well, actually some of them got de-rated on a 10-year basis. So, definitely it is in that space, public sector banks always has been in that value category around one types of price to book level. So, this pack and when it comes to earning growth, expectations are muted in this because of various-various issues on the deposit growth, credit growth, etc.
So, all in all, this is the space where even expectations are also low and that is where the valuations does not look that attractive because it never got re-rated in last 10 years. So, actually you commented on other spaces as well as financials, especially the NBFCs and the non-lenders, so non-lenders, again, insurance pack has done well when it comes to the growth and what we look at in the non-lenders space, especially the platform businesses, which has done relatively good and they continue to do better.