Market Valuation Remains Reasonable, Financials Most Attractive, Says Mihir Vora

Mihir Vora: The markets are where they are. In a sense, if you look at the large-cap valuations, they are still reasonable. I don't see any concern there. Then there are pockets of valuations and you know, especially low-floating stock category in the small and mid caps, where there is a bit of froth built up. I would be very careful on those sides. So I think there is enough juice left in the market as far as stock-picking potential is concerned. But obviously the opportunities are less than what they were one or two years ago.

So I think the core philosophy should not be forgotten. We need to continue to focus on earnings growth, stocks where we see visibility of earnings growth, where valuations are still, relatively speaking reasonable. Most importantly, do not go down the speculation path and do not go down the quality curve, in the sense we have as an investor certain benchmarks for quality of the stock, of governance, of you know the financials, etc.

Just because something's relatively cheap compared to the other stocks, which have gone up a lot, does not mean we chase the next cheap stock. So I think not compromising on quality, by sticking to the basic fundamentals, if you do that, there is still scope for stock picking in the market. As I said, there is a bit of froth in the small-cap space, in the SME space, in the mid-cap space.

But overall, I would say large-cap valuations are still reasonable and you know, we can pick and choose and build a portfolio.

Mihir Vora: Certainly because you know, if anything the last three years have proven that it's wrong to take a big call on the market on either side. So there's no point in panicking and selling, if there's a sharp correction and vice versa. There is no point in chasing when the markets are in a frenzy.

So I think sticking to the middle path and taking prudent calls is more important. So we all know the markets are at new highs. So, obviously, you don't want to do lump sum investments at this point in time.

If you are fully invested, then obviously there is no harm in you know, being a little more conservative and putting a little less money than before into the markets.

If you're absolutely underexposed to the market, then obviously you can think of a regular or a staggered investment plan. But I think sticking to the middle path is the best thing to do, not take extreme calls.

Mihir Vora: If I look at the growth versus valuation equation, a couple of sectors do stand out. One is financials, banks as well as NBFCs, where I think the underperformance has been there for quite some time, for valid reasons. Of course, there are margin pressures, liquidity has been tight.

So even this quarter, you may see single-digit earnings growth on the PAT for the banks, because the cleanup has happened, writebacks has happened, so clean balance sheet. But there is a little bit of a question in the short term as far as the margins are concerned.

But having said that, the underperformance has been there for quite some time and relatively speaking, this looks one of the most attractive sectors. I think a lot of people are underweight on the banking sector. So this sector does offer a pocket of relative value as far as growth and the balance of valuations is concerned.

See, if the call is that India is going to grow at 7–8% in the next few years, then credit will grow at 14-15%. Credit has to be supported by deposit growth. So this tight liquidity situation is not going to last forever. Good thing is that we are seeing at least initial signs of the Fed sounding a little more dovish than before. So this extreme tightness that we're seeing in the global situation, the winding of the balance sheet, now it should kind of alleviate in the medium term. So banking and finance overall looks fine.

I think the physical asset creation story still continues. Within that, of course, there are pockets where we have seen a lot of action. For example, capital good stocks, especially mid and small caps have run up quite a lot. So the attractiveness is to the extent a little less than before. But construction companies are still available cheap and they have not gone up to that extent. Again, if you're going to create their physical infrastructure, you need construction companies to do well.

So I think, you know, there are pockets for example, like pharmaceutical stocks, they have done well. But again, given the growth potential, there can be some pockets of value there. So I think there is enough, you know, some pockets in the market where we are comfortable in and that's where we would like to focus our attention on.

Mihir Vora: We are short of everything. We are short of distribution. We are short of generation, smart metering, renewables, conventional. I think we are short of everything and the sooner we ramp up our power capacity, the better.

China is approving 100–200 gigawatts a year of power capacity. I mean, it just boggles the mind where we stand in comparison to what China is building out there. So, you know, the kind of catch-up that we need to do and the kind of potential that is there for manufacturing and infrastructure creation requires so much power.

Now again, this whole data centre upside is something that we have not even factored in, say five years ago. So to that extent whatever you build will be consumed. There is a perennial shortage of power, I would say. So it's really a long-term story. So we are bullish on all the aspects, frankly speaking—transmission, generation, distribution. And, in general, our biggest overweight in the portfolio is industrials, and that is because of all these factors.

Mihir Vora: There is some discomfort at the pace of the rise of the stocks, especially driven by the fact that there have been so many thematic funds and sector-specific funds, which have come up and are driving these stocks up. That includes not only the power sector but the whole manufacturing infrastructure, including defence and all that theme.

We've seen so many mutual fund specific thematic funds as well as in the PMS, AIF space. So there is a bit of a frenzy out there, and I would be a little cautious and be more choosy than before for sure.

Mihir Vora: There could be. Too early to say, frankly, because the monthly numbers have not been so bad, at least at the repo rate level. But of course, there were these headlines of 60,000 crores of inventory that I saw a couple of days back. So that might be also weighing on the markets and given the fact that auto had done so well as a sector in the last few months, maybe you know, it's taking a breather.

We must also understand that this year is a little bit skewed in terms of the wedding season. So for example, there were hardly any weddings in the last few months. Even in July there are only a few days of wedding. Then again after August there are very few dates.

So it is, I think, one of the years with the lowest number of days which are, you know, auspicious for weddings. So we might be seeing a little bit of seasonality impact because of that too.

Mihir Vora: I think that is possible, because you know jewellery is a big thing for weddings.

But the point is that it was frankly not unknown. We all knew that there are less number of weddings this year. To some extent, it should not have come as a surprise. Anyway, when stocks do so well for so long, there's always some reason that you need to have a correction. I guess that is just an excuse for that.

Mihir Vora: The second point that you said that the runway for growth is very long, it still holds. But when our industry is growing so fast, there will obviously be some regulatory interventions from time to time.

We've seen time and again in lots of sectors that once the regulations are, you know, implemented and then after some time has passed, things come back to normal, because ultimately it's going to be a function of the macro trend which is higher financial savings and higher financial savings going into savings linked products like insurance, broking, wealth management.

So that macro, mega trend does not change. From time to time you of course, have these events or incidents. But in the long term, frankly, things all work out.

Mihir Vora: See, the government's contribution in the last three years has been immense, as far as capital expenditure is concerned. So I don't think it's necessary for us to expect anything more than what the government has already done so far, frankly.

The rest of the traction has to come from the private sector and the government is doing all it can in terms of providing the environment for the private sector to come in. We had the corporate tax cuts in 2019 and we have PLI themes in sector after sector and it looks to be an open-end approach, where more chapters are always coming in and the quantum of PLI is also getting revised.

So, I think, the ease of doing business and facilitating through PLI schemes, etc, is what the government can do and what the government has been doing very actively. So I see more of that happening rather than the government itself going out and spending at the central level or the state level.

Mihir Vora: It has to. Otherwise, there's no way we can grow at 7.5–8%.