Nilesh Shah Sees Sustained Market Momentum With Valuations Yet To Peak

Indian markets may sustain their current momentum going forward as valuations have not yet peaked, according to Nilesh Shah, managing director, Kotak Mahindra Asset Management Co. The benchmark stock indices have been hitting fresh highs, with the Nifty 50 recording its best stretch of gains in nearly 17 years on Thursday.

India's valuations are not at lifetime highs. Large-cap companies still have reasonable valuations, while small and mid-cap companies have slightly higher valuations. They are expensive in some low-floating counters. Indian markets have 25% froth and 75% provide opportunities for long-term investors, Shah told NDTV Profit in an interview.

Corporate earnings growth reflects the fundamentals. Between 2020 and 2024, earnings of Indian companies jumped to Rs 16 lakh crore from Rs 4 lakh crore, corresponding to a jump in the market because stocks are slaves to earnings, he said. Can these levels be sustained over a period of five or 10 years? Shah believes they can.

Investors look at valuations and not necessarily index, he said. "Between 2005 and 2024, the broader market returned 13% or more, which is not a very unusual number. Compared to this, the return in the last five years was roughly 21%. Before that, the market delivered an 11% return in 11 years," Shah said.

Investors should reduce their expectations from markets and value quality over quantity, he said, while suggesting high floating stocks at market discovered prices.

Domestic investors are infusing money into the market, which might create excesses, as seen in recent initial public offers, he said. "If one asks, do such companies deserve those valuations and money? The answer is a clear no," Shah said.

Shah recommends conducting double the research on a company whose promoters are selling stakes, as they possess in-depth knowledge of the company. Today, even though promoters' stock sales are at a multi-year high, they still use their funds for personal purposes such as funding extended families or business transitions. So, the money comes back, albeit in different stocks and asset classes. Each promoter's stock sale needs to be analysed carefully. 

Private banks have the potential to deliver valuations that investors are seeking in the near term. However, the current momentum is against private banks. Their net interest margins are coming down, and the cost of deposits is going up, which they are not able to pass on to the investors, Shah said. 

There's a consultation paper on liquidity coverage ratio, which, in case it gets implemented, will definitely hurt private banks' profitability as they will be putting money for liquidity coverage. Once its implementation is behind us and its effect is priced in stocks, there will be opportunity for private banks' rally. 

Shah believes that those information technology companies that are equipping themselves with artificial intelligence tools and creating better, faster, and cheaper solutions are likely to do better. Artificial intelligence and generative AI are transforming software into a commodity.

Exciting opportunities are opening up in the hardware segment with the internet of things as AI gets built. Market participants need to see which company is able to make the transition. They will be the winners in this cycle. 

Kotak Mahindra AMC has been advocating for gold investment since March 2020. Partly, it was driven by correction during the pandemic. Thereafter, Russian foreign exchange assets getting frozen by Western worlds influenced market participants to rely on gold even more strongly.

The asset management company believes that the central banks around the world are going to invest in gold. Moreover, when the Federal Reserve starts cutting rates, the commodity will get another boost.

The import duty, which has been a concern, on gold has come down in budget for 2024, so Kotak Mahindra AMC continues to advocate buying of gold. 

Indians usually buy gold in small quantities during festivals like Diwali and Dhanteras. Sometimes, women invest on a monthly basis in jewellers whose creditworthiness is not reliable. Shah said that they may consider investing in gold exchange-traded funds or mutual funds.