High single-digit to mid-teens returns might be the norm for benchmark indices in the coming year, suggested Aniruddha Sarkar, chief investment officer and portfolio manager at Quest Investment Advisors. He further hinted at a potential 5% correction in headline indices for the next year, with a 10% correction highly unlikely without significant external events.
Despite a seemingly expensive outlook based on benchmark indices, he sees individual opportunities as promising. "The breadth of the market has gone down, making it more difficult to achieve easy gains," he noted, emphasising the need for careful selection.
Ola: Still Time To Enter?
Ola's investment opportunity may have been missed, according to Sarkar. "We missed the bus on Ola."
However, he cautioned against entering just because the stock has performed well, underlining the importance of margin of safety and justification of valuations.
Also Read: Foreign Investors Recalibrated To Cash In On Small-, Mid-Cap Outperformance: ICICI Securities
Sectors To Watch
Sarkar was particularly optimistic on urban consumption, which had shown impressive alpha creation over the past year.
Key areas of interest include consumer discretionary, hotels, auto and auto ancillaries, and real estate with its corresponding ancillaries, he said. Although the last quarter was weaker for hotels due to election-related uncertainties, he is still quite bullish on the sector.
Sarkar highlighted Trent Ltd., a subsidiary of the Tata group, as a notable example of growth, with expectations that Star Bazaar Pvt. will emerge as a future growth driver for the Tata group. "Weightage management and valuation checks are crucial, and Trent has displayed unbeatable growth," he said.
NBFCs Versus Banks
Having been underweight on private banks for the past four years, he now sees potential in certain private banking stocks, especially ICICI Bank Ltd., which has shown strong returns.
However, the banking sector has faced challenges due to pressure on net interest margins, Sarkar said. He remained optimistic about private banks in the medium term, anticipating improved performance in the next two to three quarters.
Sarkar was more bullish on non-banking financial companies, particularly those involved in asset management, wealth management, insurance, and housing finance.
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Also Read: Zomato's Acquisition Of Paytm Ticketing Business Positive But Most Brokerages Yet To Price In
Here Are The Edited Excerpts
We live in very interesting times. The start of this month, there were concerns about a global recession, a Japanese carry trade unwind. All of that was done within 24 hours. Then, of course, we constantly argue about how valuation in Indian markets look expensive. PMS funds are sitting on significant levels of cash, is what I've been told. But the markets have a mind of their own. There seems to be no breaks and no pauses. What are your thoughts?
Aniruddha Sarkar: So basically, I think one thing it works in the market, always, when everyone expects something, it's not going to happen and practically, as you rightly mentioned if I see in the last four or five months, almost everybody has been waiting for a big correction in the market. There have been times wherein, you know, there were events in the market, both on the domestic side, on the international side, and you know, there were expectations that markets will fall. But again, as you rightly mentioned, the corrections have been extremely, extremely short lived.
One thing I would want to mention in this is that, and this is something I'm telling investors also, that don't wait for a big correction in the market, because if I look from a four, five-year horizon, I think all the building blocks are in the right place, when it comes to the whole India opportunity, and that is where I would say any money which is waiting on the edge or I would say the sidelines, both domestic money and I would say on the retail side and on the mutual fund side, that is entering the market on every dips. Valuations, they look expensive from a headline number, but if I look at individual companies, definitely, there's a lot of opportunity.
It has definitely become very difficult to make, I would say, easy money in the market. Breadth of the market has gone down. But having said that, I think that is where you know, the job of portfolio managers has become all the more important, because you can't buy anything and make money in the market. In this type of market, you need to be very selective where the earnings are coming from, and which sectors to avoid and which sectors to be in and also at what price you are wanting to buy those opportunities.
Let's start with that then. Are you fully invested in this market because as a PMS fund manager you do have this option of sitting on cash and you also have the ability to sit on significant cash if you have too before you allocate it to the market. What is the portfolio stand and how much cash in the portfolio or fully invested?
Aniruddha Sarkar: I normally, you know, on an average 4-5% is the average cash typically I keep at all times, and I continue to maintain that. I'm not very high on cash at these levels. So, I'm maintaining my average 4-5% cash, which I normally do at all times. Having said that, wherever I'm seeing a sharp runup in the portfolio companies where valuations are kind of, you know, gone beyond my wildest expectation, there I'm definitely bringing down the exposure.
I'm not getting out completely, because many of these companies where the valuations have become rich, interestingly, that is where the highest earnings growth is also coming from. So it's a kind of you can say the confusion that multiple wise looks expensive, but then when you look at the earnings, that is where the numbers are coming from. So some amount of the weight trimming I'm doing, but not sitting on a high cash.
So where are your biases, Aniruddha currently at because a lot of the stuff that you own and I want to talk about specifics, like a Trent and a Zomato, which keep rewarding investors and this morning, of course, we have news on Zomato as well. But talk about the outperformers and the underperformers, because I believe you're still holding on to a few stocks that haven't delivered on the market performance?
Aniruddha Sarkar: With regard to, if I just begin the discussion from the broad sectoral exposure, and that is where I would say the big alpha creation has happened. If I see the last one year, the big alpha creation has happened from being overweight on the whole the urban consumption story. Both the names which you took, you know, Tata Trent, Zomato, they have been a part of your urban consumption story and that is, I would say where the big numbers have come from.
I have been bullish on urban consumption, and within urban consumption, if I break it down into the sectors within that, one is the consumer discretionary, which includes the names which I mentioned. Then the other part is hotels, which has again done exceptionally well. We continue to see a lot of demand on the hotel side, the last one quarter was weak because of elections and all. But hotels continue to do exceptionally well.
The third sector, where it has again given us good returns, is the auto ancillary space. So, auto ancillary continues, auto and auto ancillary, that again, is a good space where I would say a lot of alpha duration has happened.
The fourth part is the real estate and ancillaries. So these four sectors are broadly within your urban consumption, and that is where the big alpha has come from. The second major broad allocation, where I would say has done really well for our portfolios and for our investors, is into the whole industrials and the capex. Now when I say industrials and capex, it includes your sectors like capital goods, engineering companies, power, have been very bullish on power space, and I think that's one big sector investors, even at this point, should be betting on, because there's a lot of power transformation which is happening in the country.
We have not seen this type of a power capex in the country for a long time. So, within industrials, you have capital goods, engineering companies, power and when I say power, it's about value chain of power, not just the power producers, but you know, your entire supply chain, transmission, distribution, wires, cables, transformers, and all of them power EPC players. Also, we have some exposure in the cement companies, because if you're bullish on infra and real estate. It's an indirect beneficiary of that.
You know, Aniruddha, you said that you've taken profits off the table, and stocks that run exceptionally well. Now, the first stock from your list that comes to my mind is Trent. You know, it's expensive, the valuations look stretched, but the performance has been phenomenal. Will you continue to hold on to Trent, or are you taking some money off the table on Trent?
Aniruddha Sarkar: I'm with you on that, because I think Trent has beaten all our wildest expectations. Like, you know, in fact, when we got into the company at roughly around 1,400-odd levels, that was our first initial entry. We had never thought we'd look at this type of a return in such a short span of time, but I think weight management is very, very important and when I'm saying I'm booking some profits, it's basically the weight management because anything which goes beyond 8%, 9%, 10% in the portfolio, typically, I try to bring it down.
With the type of return a company like Tata Trent has given, I think if I had not booked anything, definitely the weight in the portfolio would have gone to the mid-teens. Weight management is something I do, because valuation check is also something which we need to keep an eye on for the whole portfolio. Barring that, it still continues to be among my top three and with the type of growth which it has shown in the business, which is the Zudio, it's simply kind of, you know, unbeatable by any standards. The next growth which we are expecting, and also the management for the last couple of weeks I've been talking about is the Star Bazaar, and that is again, going to be our next big growth driver for the company. So I think it will continue to beat the wildest expectations for the investors.
You know, another sector that your portfolio seems to have an exposure to is private banks. Nearly 11% of your portfolio is 10.5% is to private banks. Then the top holdings are ICICI Bank and HDFC Bank. Do you feel like these stocks are attractive even at these levels from the next six to 12 months perspective, or do you think there will be better opportunities to buy them?
Aniruddha Sarkar: The private banks in general, I've been very underweight, like if I look for the last four years, broadly, I've been very underweight on the private banks and within that, ICICI has been my top holding, and that has definitely given us exceptional returns. HDFC, something which I bought in the last one year. I have not held HDFC for a long time. It's only in the last one year when I entered into HDFC, and that was primarily because of the valuation.
I think, you know, the valuations are, where these private banks are trading today. I think the downside looks limited. Obviously you will not see a multiple expansion from here on, because I see some pain in the banking sector with regard to the NIMs contraction. So you will see the NIM contracting and business growth not meeting the past expectations, keeping the price to book at where it is today.
So, you see more of an earnings-led price appreciation and not a multiple expansion in the private banks. So, I think we have to look at the private banks more bullishly, maybe just one or two quarters down the line where I think you will see the NIMs pressure also declining. Just to add on that, I'm more bullish on the non-banks and when I say non-banks, it's the other, the non-bank, financials, like your asset management companies, wealth management, insurance, housing finance, that is where my other allocations are.
What about Nuvama and Angel One, BSE camps because that is where all the household savings, I believe, are headed to. Do you not see value in those counters?
Aniruddha Sarkar: We have a couple of these names, which you mentioned in our, you know, evaluation list. But as of now, we don't have, you know, any of these names. Yes, on the AMC side, I have the Nippon AMC, which is there in my portfolio, and that has again, done exceptionally well, being the best.
I would say that, you know, they have been growing the fastest, and also their portfolios have been doing well and we know, with regard to the AMC business, it's all about, you know, mutual funds do well, that attracts more and more money. So, I think Nippon AMC has done well to beat its peers, and that is a good allocation in our portfolio.
On wealth management. we have one wealth company, we have one insurance company, and we had Housing Finance also, but we booked profit because they had moved up exceptionally fast and, you know, valuations had again become rich over there.
Zomato is trading muted, while Paytm trades high. Aniruddha, why don't you share your views on it? You own Zomato, it's been a key contributor in your portfolio. Do you think they've paid too much to pick up the ticketing and entertainment business of Paytm, or do you feel like this is a strategic move that will eventually play its course?
Aniruddha Sarkar: See, I would say that if I look at the management history, I think they have an exceptional track record with regard to execution and this whole business you know, of whether you talk about ordering food or the quick commerce or the ticketing business, it's very difficult to execute, and execution is a big differentiator there.
For Zomato, I think, definitely not getting into the valuation at what they bought, Paytm and whether it's the right valuation, I would say that we need to give them some time to see how this exactly syncs on their platform. One thing which I would say is that Zomato is one app which most of us open almost every day, whether you're ordering on Blinkit or you're ordering food.
That is one app we open every day and if they are able to integrate this whole ticketing business, the whole concept of booking tickets, booking shows and all that on that, the moment you're opening your app for ordering food or ordering Blinkit, if something shows in front of you, there's a very high chance that instead of going to a BookMyShow to order to book those tickets, you might actually use Zomato, inbuilt app for booking those events and those shows. So we have to give them some time to figure out how they're actually able to integrate and whether it actually adds a good kind of a business model in the long run.
Aniruddha, another stock that had caught everyone's attention on the Street in the last couple of weeks has been Ola Electric. It looked expensive before it went into IPO, and the stock has doubled in less than 10 trading days. What is your view on Ola Electric? Do you have this counter in your portfolio and maybe you don't, and if you don't, would you look to buy it at the right price?
Aniruddha Sarkar: Yes, obviously, I don't have it in my portfolio. But obviously, when I look at the price, definitely, you know, being on the outside of it, it seems, you know, we missed the bus. But I think, you know, it's very difficult to justify valuations at times and you know, if you're not able to justify valuations to yourself, then you know, I think some ideas you have to miss out, because I think the margin of safety is very important and just because a particular concept is doing well and the stock is moving up, you know, that would not be a good reason for me to enter into the business.
Obviously, it's being run exceptionally well, and they are kind of doing very well on the whole EV on the two wheelers, but it's difficult to justify, you know, the valuations at this point of time.
Any other new listings, IPOs that you're keeping an eye on Aniruddha, because there's this whole debate, you and I both discussed valuation. There might be a little more value in the new entrance or the new debuts on the exchanges before they hit the market. Anything that you've spotted that you like. I mean, Saraswati Saree Depot was on those of your Orient Tech, anything that you're eyeing or you've gone and subscribed to?
Aniruddha Sarkar: Normally on the PMS, we don't, you know, apply in the IPOs, because PMS, you can't apply into IPOs. But we also manage the AI funds, and from that in the past, we have done a couple of them. We have participated in some of the IPOs, but yes, as of now, in the last, I would say, six to nine months, we have not participated in any of the new listings which have happened, there are some good companies which are in the pipeline for IPO.
Now some of them are in housing finance. A couple of them are into other engineering and capital good companies. So we are keeping an eye on them and I think valuation wise, they look much, much better. So for me, valuation is a very, very big factor before I get into any of the new companies which are also coming. So I would say that we are more confident in some of the good companies which are in the pipeline for the IPOs in the days to come.
So those be Aniruddha and I do understand from the AIF portfolio, but what is it that you're constructive on, anything that you're closely watching on the IPO side?
Aniruddha Sarkar: So I think one big name which is very interesting is Bajaj Housing finance, because excellent management, and definitely housing finance is one area where I'm very confident, I'm very bullish on and this whole affordable housing, along with, I would say the penetration, I would say the market reach, which Bajaj Housing Finance would have, it has on the ground is something very interesting to see, and it will again boil down to what valuations it comes, we have all the numbers floating in the market.
You know whether it's going to come at this or that multiple, but I think that is one name I'm keeping an eye on when the IPO happens, and it should be an interesting listing.
It should definitely be an interesting listing. Very quick word now, from between now, or rather the markets have, and you'd agree with me, borrowed returns from the future, from the way we've had, or the run we've seen in the last one year. Do you feel that between now and maybe the end of this calendar year, it could be a lot more lukewarm, consolidated kind of phase, or do you feel like more new record highs are very possible and also, where do you think the leadership potentially could come from, in the next six months for the market?
Aniruddha Sarkar: I think in the next one year, investors should be aware that you should not expect more than mid-teens kind of annualised return for the next one year. If you get a mid-teens, I think you should be more than happy. Anything in the high single digits to the mid-teens is what index can give you in the next one year.
That is, I would say, a very good expectation. Having said that, there are no new sectors which I'm looking at, the sectors which I mentioned, both urban and semi urban, consumption, industrials and capex. These will be the two major areas where I think a lot of money can be made.
Valuation, one needs to be very aware of what price you're buying. One thing, which I'm noticing in the market is the breadth of the market has gone down big time, say, around six, eight months back, almost 62% of the small caps were outperforming the small cap index.
That number has gone down to almost like 25-30% now. So the breadth of the market has gone down. So, I think one needs to be very, very careful where you're entering. Headline wise, I don't see any reason why we can't make fresh highs in the short term also because I think all the right ingredients are in place.
So very lastly, do you feel like this impending correction that we've talked about and we started this conversation with is likely, and you did say that these corrections that you tell your clients are now very shallow in nature. Do you think a 5-10% or a closer to 10% correction over the course of the next six months is even a possibility at this stage?
Aniruddha Sarkar: I would say a 5% correction is very, very possible. A 10% correction for the headline index looks very, very difficult without any external event. External event, we don't know what it will be, because that's certainly always a Black Swan.
But I would say looking for a 10% headline index, Nifty correction, or Sensex correction, without any external events, is very, very unlikely. So, 4-5% correction is a very kind of, you know, it should be there always, at least the weak hands, they keep moving out and that's the way the market becomes much better in the long run. But expecting a very big correction in the market, I think investors should not be waiting for a very big correction.
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