Shiv Chanani, Head of Research, Elara Securities India, said that he likes to look at investment opportunities from the framework of growth enablers. India being a growth market, it is important to evaluate companies that have capabilities to grow on a consistent basis over the long term.
Chanani has over 20 years of experience in Equity Research and Fund Management. His prior experience includes working with ICICI Securities Limited, Reliance Mutual Fund, Sundaram AMC and E Fund Management (HK).
In an interview with Moneycontrol’s Kshitij Anand, Chanani said that while the valuations may look expensive from a historical perspective, it is important to bear in mind that India is coming off a significant corporate earnings recession of the last decade because of varied reasons.
Edited excerpts:
Q) What month it has been for markets? Fresh record highs, which was followed by some volatility in the broader market space, and then again we found some stability. How is the market looking according to you?
A) What we are witnessing is that while India is going through a recovery phase from the impact of Covid wave 2, developed economies like the US and the UK are reeling under the impact of wave 3.
Add to that, regulatory clampdown on the tech sector by the Chinese government has created significant uncertainty and resultant volatility in the market. We believe that the next two months are going to be very important because of two reasons.
Firstly, one would be looking out for the effectiveness of vaccination in fighting wave 3, particularly in economies like the UK, where the vaccination rate has been higher than the rest of the world. If it is established that vaccination indeed results in lower numbers of infections and much lower number of hospitalisation and mortality rate, then it can be a big booster to the confidence for sustained global recovery.
As developing economies like India improve vaccination rates through the rest of the current year, one could be looking for a significant economic recovery in CY22.
Secondly, as India goes through the unlock phase from hereon, the trajectory of new infections would be closely watched. Currently, everyone is apprehensive about India being hit by a wave 3 in the coming months.
However, the world is experiencing wave 3 because of the delta variant, which India has already gone through.
Hence, there can be a likelihood that India has a much milder wave 3, if at all. Such a scenario will be a big confidence booster for both consumers as well as businesses and can set the tone for a strong recovery in the second half of the fiscal year.
Q) Well, Jim Riggers has warned of a bubble in the debt market space across the globe, and the warning was stretched to stocks as well. What are your views – is the market in a bubble zone and the hope based rally could take a knock?
A) We are in the middle of one of the biggest transition phases that the world has ever witnessed. Two big factors are transforming businesses across sectors – tech disruption and climate change concerns.
This is leading to new business models being formed (fintech, health tech, edu tech, renewables, EV, et al.) and traditional businesses getting disrupted.
In such a scenario, we are seeing a polarised market where investors are willing to give higher valuations for new-age businesses and significantly de-rating legacy businesses.
Combined with that, easy liquidity emanating from historically low-interest rates is further creating upward pressure on valuations of the so-called unicorns.
Admittedly, not all businesses or companies would be successful and some would fail. Consequently, one would expect consolidation in the space in the medium term. Nevertheless, the future winners would undoubtedly be from the digital space.
Q) What are your views on the EV space which seems to be getting all the attention? Many companies are coming out with CAPEX plans on developing EV or switching to clean energy?
A) EV is the biggest technological change that the automobile industry has witnessed ever since the advent of Internal Combustion Engines (ICE). Given the increasing concern over climate change and the global race to achieve “net-zero” carbon footprint, pace of adoption of EV technology has surprised everyone from incumbent automakers to policymakers worldwide.
However, we are now seeing all the constituents taking decisive action towards transformation to an EV ecosystem.
Hence, it is not surprising that companies (incumbents as well as challengers) are drawing up aggressive plans for EV strategy. We firmly believe that EV is the future of automobiles and the pace of transition can surprise positively.
Q) Small & midcaps have gone up 3-4x from the lows. Do you think this euphoric rally has stretched beyond the limit? When could the music stop?
A) CY21 has been a banner year for mid and small caps with significant outperformance to the headlines index. However, if one were to look at a 5 years timeframe, one would see that the mid and small caps have performed in line with the headline index.
This tells us that, the mid and small caps have just about caught up with the underperformance of the previous 4 years or so.
Nevertheless, we believe that given the broad nature of the space, painting it with the same brush is always fraught with danger.
We always prefer a bottom-up approach while evaluating mid and smallcap stocks and it is always advisable to look at companies that can evolve from small to mid and mid to large – not in terms of cap curve but in terms of business fundamentals. Because if they deliver on later, cap curve would follow.
Q) What is your investment mantra or your checklist before buying a stock?
A) We like to look at investment opportunities from the framework of growth enablers.
India being a growth market, it is important to evaluate companies that have capabilities to grow on a consistent basis over the long term. We believe that there are three important components to that.
First important factor is opportunity size or total addressable market. There can be a small niche opportunity that is very profitable, but the company would fail to gain scale over time.
The second factor is the dynamism of management (and we include promoters as well in the Indian context). This is very important factor and more so in the current environment where every business is faced with disruption.
The management needs to be dynamic to pivot to changing business environment and adapt to new realities. Nimble and agile management will not only be able to survive but also thrive in times of uncertainty.
The third factor is ability to attract capital. This can manifest into multiple variables such as credit rating resulting in ability to raise debt capital, free cash flow generation capabilities of the business, and finally management capabilities of attracting long-term equity capital.
Q) What is your take on current Nifty valuations? Are we trading at a premium and how do we stack up against our emerging markets peers as well as developed markets?
A) As per our estimates, Nifty is currently trading at close to 20x PE on FY23 earnings. The valuations are comparable to developed markets like S&P500 and at a premium to emerging markets.
While the valuations may look expensive from a historical perspective, it is important to bear in mind that India is coming off a significant corporate earnings recession of the last decade because of varied reasons.
Secondly, India has stood out in terms of resilience and ability to bounce back from the pandemic faster compared to other emerging markets.
Thirdly, with the current clampdown of the tech sector by the Chinese government, India clearly stands out amongst emerging market peers and hence the premium valuations can be sustained.
Q) The IPO euphoria is only getting bigger by the day. How do you sum up the action? What is the kind of fund raising you foresee for the rest of 2021?
A) We believe that there are two factors at play here. Firstly, India witnessed historically record activity in the private equity space in the last 3-5 years timeframe. A lot of such investors are now looking to exit their investments taking advantage of favourable secondary market conditions.
Secondly, the Indian secondary market is significantly under represented in the new economy digital sectors as loss-making companies were not allowed to list earlier.
Once the regulation was changed, we are witnessing significant activity around the listing of new-age companies.
We perceive this as very positive for Indian markets and investors as they get the opportunity to participate in future growth stories. The IPO pipeline seems to be very robust at this point of time.
Q) Any pocket or sector which you think could come under pressure in the near future and why?
A) At this juncture, consumer-oriented sectors are facing twin pressures of an uncertain demand environment and higher input prices. Given the current subdued, companies are not confident of the market’s ability to absorb higher prices which is constraining them in passing the impact of higher input prices.
However, as pointed out earlier, if we get a positive surprise from the absence or a milder version of wave 3 of covid, then consumer sentiment should rebound strongly and the consumer sector would be able to find its mojo back.
Q) The much-talked-about $ 1 trillion infrastructure bill got approval from the US Senate. Which sectors could benefit from the move?
A) We believe that this is an important event as the US embarks upon a major infrastructure spend after decades. Metals would be the direct beneficiary on account of stronger demand and hence strong prices.
Specific to India, capital goods companies would stand to benefit the most as engineering goods already account for more than 20% of India’s total exports.
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