The Indian stock markets can see a phase of correction triggered by the selling by foreign investors and valuation concerns, according to Ashwini Agarwal, founder of Demeter Advisors LLP.
Speaking to NDTV Profit, Agarwal suggested that while a correction is around the corner, it is likely to be of a shorter duration.
"I don't think there is a deep correction in the offing, but we should brace for something similar to what we saw between Sept. 2021 and March 2023, an 18-month consolidation with about a 15% correction in the Nifty index. This time around, it might be shorter, and the number could vary between 10% and 18%," he said.
Agarwal quoted a research report that suggested that nearly Rs 1.5 lakh crore was raised from the market during the first half of the current financial year.
"This doesn't include offers for sale from existing investors or promoters. It's purely QIPs plus IPO money—a significant number. Assuming a large allocation of $70–75 billion to equities from domestic investors, both direct and indirect, this amounts to roughly $18 billion in the first six months, which is substantial," he added.
Agarwal highlighted selling by foreign individual investors, higher valuations, and a slower growth trend as key reasons behind the possible corrections.
"We’ve started to see foreign selling, with investors presumably allocating away from India, possibly to China. Valuations are not very expensive but are around plus one standard deviation, coupled with slowing earnings growth. Putting all of this together, it's time for some correction, a time correction for sure. I'm less certain about price correction," Agarwal explained.
Commenting on the Reserve Bank of India's recent Monetary Policy Committee announcements, Agarwal said that consolidation was the only way forward.
The central bank has kept the repo rates unchanged for the 10th straight session, in contrast to expectations of a possible rate cut.
"A lot of things have run their course. The government can't keep increasing spending on infrastructure year-on-year; fiscal consolidation is the right path," Agarwal said.
He, however, expects the RBI to maintain an eased stance on money supply.
"The base money growth has been disappointing, keeping liquidity tight. With the rupee breaching the 84-mark against the US dollar, if the RBI starts buying currency and releasing liquidity into the market, we might see some relief, but that depends on the RBI's view on liquidity at this time, especially since they’ve changed their stance," the top executive concluded.
Ashwini Agarwal's Take On Market Correction|Watch
Here Are The Excerpts
Ashwini, for the longest time you've been talking about how there needs to be a return of some sanity in the markets. You could argue maybe that it's not completely that way. But certainly, the last few weeks have shown that the market seems not to always be a buy on dips. At times, it can actually follow the sell-the-rice template too. We've set the cat amounts, the pigeons, if the pigeons were bulls
Ashwini Agarwal: So, you're absolutely right and I think, you know, we are just starting to see sanity creep back in, as you say. I don't think there's a deep correction in the offing, but I would venture to think that, you know, we should brace for something similar to what we saw between September ‘21 and March ‘23, which was an 18-month consolidation back then, and about 15% in terms of Nifty Index, if my memory serves me right. Now, this time around, it might be shorter and the number of 15% might be a little bit different. It could be 10% or 18%, who knows? But I think we are set for a little bit of a consolidation.
I think there are multiple reasons. One is, you know, which I have been talking about for the last three or four months is the intense supply of paper. I was reading this report about how much money has been raised in the first half of this year, and it's about Rs 1.5 lakh crores. This is, you know, this doesn't include offers for sale from existing investors or promoters. This is purely QIPs plus IPO money, and it's a pretty significant number.
So, you know, even if you assume a very, very big $70-75 billion incremental allocation to equities from domestic households, which is direct plus indirect, via insurance companies and superannuation and so on. If you put all of it together of 75 billion this in the first six months of about roughly 18 billion is a pretty substantial number.
In addition to that, you started to see foreign selling, people allocating away from India into presumably China. I don't know for certain, but if that would appear to be the case, then you also have valuations which are not very expensive, but, you know, bumping around the plus one standard deviation, and you have slowing earnings growth. So you put all of this together, and I think it's time to see some correction, time correction, for sure, price correction, I'm less certain about it.
Ashwini, for the longest time, the reasons are always there. The factors were not adding up and one of the reasons why the markets got bought on dips at all times was that while FII inflows were missing, but the DII flows were strong, we still have the DII flows looking okay, but there are FII outflows now, and which might have led to the corrective move in the recent past. My question is, therefore, what could be the factor that would lead to this correction, while the reasons are there, would it be continued FII outflows, or would it be the domestic money taking a bit of a pause?
Ashwini Agarwal: It will be both. See at the end of the day, the markets are decided by the marginal buyer or the marginal seller. So as the supply keeps increasing and the supply is from new paper, the supply is from existing investors, whether it's promoters or FIIs, and it's counterbalanced by the domestic money, which has been the sort of holding the fort, on buying. So as the supply keeps increasing, at some point in time, the supply takes over and then, you know, we find answers as to what is the reason why the market is falling?
Then we point to earnings growth, we point to the uncertainty in the Middle East. We point to oil prices. We point to all sorts of things. The reality is, it's all demand and supply and as supply keeps increasing, it makes it difficult for the markets to continue to go up. At some point, the domestic investor, especially the retail participant, driven more by momentum than by anything else, he starts to wonder if he's in the right place, and that's when you see a big step down. So, we haven't seen that happen yet, but we may, who knows.
Okay. We might actually have some words from the Reserve Bank coming soon as well. So, we'll try and get you that. But what about policy decisions? Ashwini, are you kind of constructive there? Are you negative there? What's your sense? I mean, the RBI showed its hand, not in a rush. But is there a positive thing or from a rate sensitive perspective, you would have hoped for some more clarity and maybe some more action?
Ashwini Agarwal: While the market was hoping for a 25-basis-point cut, I don't think it was a consensus view at all, and I think there were a lot of people who expected no change. I mean, inflation is one aspect. Geopolitics is the other factor and inflation report, even in the US, which is driving this whole narrative about lower rates are quite mixed.
I think in the domestic environment, growth continues to be reasonably okay. I think policy decisions have been fairly supportive from the government, at least. You know, whether you talk about it, you know what they're trying to do, trying to bolster the economy in whichever way they can. But the reality is that, you know, a lot of things have run their course. I mean, the government can't keep spending more and more money on infrastructure on a year-on-year basis. I mean, fiscal consolidation is the right path to go.
I think on the policy front, the only thing that I would hope for is a little bit easier money supply. I think the base money growth has been a little disappointing, and that's kept liquidity very tight. There, I would have expected some relief. So now, with the rRupee breaching the 84 mark on the U.S. dollar, if the RBI starts buying the currency and releasing some liquidity to the market, you might see some relief there, but that too depends upon what the RBI thinks about liquidity. At this point in time, they've changed their stance on the policy, so that's something that I'm looking forward to. But let's see how it unfolds.
So let's assume that you were sitting on some bit of cash, because you were admittedly talking about caution sometime back. I'm presuming that from what you've told me today, you are not in a hurry to deploy but base if there are some decent numbers that come out in Q2 because while the headline may look soft, but that is because of Cement and Oil and Gas or Energy otherwise, the other sectors may actually post in decent growth. Where is it that you are looking out for earnings performance, which might prompt you to put in some dry powder to work, even if you are maybe not as constructive on markets?
Ashwini Agarwal: I don't think there are any standout sectors where you see an incredible amount of value, barring financials and financials have been quite undervalued relative to their own history, and even the microfinance companies have sold off quite a bit in the last three months. So, you know, that's one sector that kind of stands out in terms of value relative to the rest of the market or relative to its own history. But barring that, there are really no sectoral standouts which one can point to.
But I will tell you this, that on a bottom-up basis, there continue to be some ideas that get generated, not a lot but, but some for sure. I think, you know, given how I look at things, I typically try and look at stocks that still haven't participated in the rally that we have seen in the last few years, or what we've seen since Covid, and since Covid, everything has participated. That would be wrong. But I think there are stocks that haven't participated in the value of the last two years, and I'm looking at them and figuring out if there's an opportunity there. So it's harder and harder to find bottom-up ideas, but I can find some, and that's what I'm doing.
The other place where I'm personally quite excited about this, the private space, especially mature companies that might mature from an IPO perspective, that might go public over the next two to three years. I think there are opportunities available in that space. Ticket sizes are higher, so for many of your viewers, the access to those transactions may be difficult, but that's another place where I see a reasonable amount of value to put some money to work.
Okay, that's interesting to hear from Ashwini Agarwal, that there are not too many pockets wherein there is value. You find value in growth because, I mean, the estimates seem to suggest that EMS, for example, the growth numbers will be solid. But somebody was cautioning me on Friday that if you just look at the cash flow converted Ebitda to the CFO, those statistics are abysmal for a bunch of these EMS companies. I'm just trying to understand, how do you think of that bucket, considering that the reported growth will look okay?
Agarwal: So, you know, I'm a big slave of cash flow. So, you know, growth without cash flows is not something that appeals to me unless you're in the very early stage of a very long-growth cycle. So, EMS obviously makes a cut in the sense that, you know, it might be a 10-15-year growth story or 20-year growth story, but the valuation still doesn't appeal to me. So unfortunately, I'm not invested there.
You know, in hindsight, obviously one wishes that one had but you know, I'm a value investor, and an old-fashioned guy, so it's okay. I will partake of something else in the 1,000-dish buffet that we are at.
One swallow does not a summer make, but certainly lays out the perils of investing in a high-growth business when a quarter of growth is gone and maybe Avenue Supermarts will bounce back. It's a fabulous business run by a fabulous guy. But for somebody who's tactically got in is really licking his wounds or her wounds because of the high valuations and now the inability to show growth for a couple of quarters now?
Ashwini Agarwal: This is my whole reason why you know why I dislike investing in stocks that have very high multiples, whether it is price to sales, price to book, price to earnings, Ebitda, whatever you look at. Principally being that the room for disappointment is very low. I tend to kind of go where value is, so your downside is protected, hopefully, and you make a lot of money if you're proven right, and the business is doing better than what the street thinks.
It's always about betting on what your view is versus the street’s view when you're doing bottom-up stock picking and this is clearly a situation where expectations were not met, valuations were rich, and that's why you're seeing the pain today. So, we don't know what happened in the long run.
But the other point I'd like to make on consumption is that I'm continuing to see very mixed trends in consumption. I mean, the K-shaped, you know, much talked about the K-shaped recovery that we saw post Covid continues to have legs with stronger demand for more expensive luxury products and kind of weaker aggregate demand for bottom-of-the-pyramid products, I think two wheelers is an exception.
But outside of that, I'm not seeing a lot of traction for demand and that's quite puzzling, actually, because I had thought that election spending would provide some boost to rural demand. Monsoons have been very good. Inflation is reasonably well behaved, so I don't understand it. This has been bothering me a little bit, and I don't have an answer.
One of the things that was noted though, Ashwini, is that quick commerce growth is continuing unabated, even if organised retail might be facing in select pockets, a problem or two. Trent is not showing any such problem. Some of the others might be. That's another stock with such massive multiples. But of course, the growth is there. But here's my question, therefore, while there are some puzzling things there, is quick commerce still a pocket to look at seriously, simply because the growth numbers are looking very, very strong for both the listed and unlisted ones?
Ashwini Agarwal: Absolutely, you're right. The partly problem in consumer retailing has been the disruption caused by quick commerce, and quick commerce is here to stay. I mean, all of us are getting used to ordering on the Blinkits of the world. I mean, who doesn't like a 15-minute delivery and I think it's here to stay, and it will probably gather momentum. Let's see how this unfolds and there is a path to profitability that some of the people in the private space need to find but so far now, the growth is so good that funding the losses is not going to be a problem.
For the moment, this market share shift from modern retail to quick commerce, or from traditional kirana to quick commerce, will continue. I don't think there's any way out. I mean, I think this is a reality.
Okay, so select names bankable in the quick commerce space. Ashwini, I'm just trying to derive the final answer here?
Ashwini Agarwal: Could be. Solutions are expensive, but you could get to eat the growth. I don't think you will get to see multiple expansions, but you could get to eat the growth and growth is going pretty good.
Got it. Now, talking about different pockets, let's say or sticking partly to consumption in the midst of presumably a long cycle, which is Indian real estate. I read a report from Knight Frank over the weekend that high-end real estate prices might be set to correct. It doesn't show in the demand numbers that are happening across various companies which are launching projects, NCR, Mumbai, where have you. Been trying to think about how you are thinking about this pocket because you were an early investor, I know, into some of the NCR companies. Maybe MMR too, I don't know, but certainly NCR. What is your view on the attractiveness, or the lack of it, of real-estate companies now that there's been a bit of a rally into some of them?
Ashwini Agarwal: So interesting question, and I've kind of been puzzled by it as well, that how many people are there in India who can afford to buy homes that cost, you know, $5 million or more and it's incredible, some of the prices for new offerings that are being charged. There could be some consolidation possible. But also, there is a very high correlation between stock markets doing well and real estate doing well. If you go back to the argument that you're not in for a very deep correction, you're probably in for some time correction, and probably single digit high, single or low, double digit correction in terms of prices, then I think the tailwind that many people who have been invested in the markets for a while have in their personal fortunes will continue, and therefore their ability to to pony up for homes.
If you recall our initial conversation, I had said that you know a good home is a basic human need and something that is the first port of call for savings. So you know, when you look at people who make a substantial amount of money through a private company being listed, or through options of having worked in a startup, I mean, it's natural to expect that they will go and buy themselves a good home. So I think the underlying demand trends will continue. Maybe you won't see the price appreciation that you have seen in the last two or three years. I mean that's how I think about it.
Intuitively, I don't see a massive sell off happening in real estate, something akin to what we saw in '96 to 2003 or something that we saw from 2011 to 2020 and the reason is we are not seeing higher rates. We are not seeing higher interest rates. We are not seeing a massive amount of bubble in some other part of the economy which needs to be deflated. I mean, historically, real estate falls have been accompanied by a downturn in the economy, and I don't see that happening.
Ashwini, the other point is chemicals and for the last 12 months, I have been listening to the possibility of good times, because the sector was consolidating for such a long time. But the China pressure is here and real, dumping is still on in select pockets, as promoters tell us as well. I'd love to know how you are thinking about this bucket, because sporadically we see these, like the Sudarshan Chemical announcement of the acquisition, etc, an announcement here on, an announcement there capacities are coming on. The stocks aren't quite moving. They are not showing the results as well?
Ashwini Agarwal: I think you have to be a little more longer term in your view, and look at the positioning of a company in its space. Where is it adding value? What is it doing and what do you expect three to five years from now? So what I would say is that the way I think about China is that, from a top-down perspective, what China wants to do is more in terms of new technology, innovation, value addition, they're really not interested in supplying bulk chemicals to the rest of the world.
I think some of the pressure will continue in the short run, because they have capacity, and the capacity will keep churning out. So that might happen, but in the longer run, that will not hold true, and what the Indian companies have done is occupy niches where they can add value through domestic chemistry skills, ability to manufacture quality products at a lower price than the West can. This whole China plus one narrative, has allowed people to come and look at India a little more closely. So I think there is an opportunity there. You have to be very bottom up. You have to be very stock selective. But I'm quite constructive in this space.
Actually, I think there's a lot of value that will be generated in the years to come. It may not happen across the board. It might be very selective, but I think it will happen. Also, you know, what you will see is margin normalisation happen because, you know, you went through two or three very tumultuous years post Covid, where initially end product prices ran up and abnormal profits were made by domestic chemical manufacturers because they had low cost raw material inventory, and then raw material prices went up, and product prices crashed, and you had a shipping crisis.
So you know, you had this massive YoYo in margins, where you had abnormally high margins and then abnormally depressed margins. I think now the margins are coming around to what they are sustainable. So now you will start to see growth from projects to become visible in earnings. So I'm actually quite positive.
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