At a time when a euphoria of sorts has gripped the equity market with the benchmark indices scaling record highs, one voice raises a note of caution. Meet Srinivas Rao Ravuri, CIO – Equities at PGIM India Mutual Fund.
Valuations are almost at a life’s high of 24x one-year forward, so there is very little room for more upside in the market, he says. In an interview to Sunil Shankar Matkar of Moneycontrol, Ravuri says it has become a seller’s market. So he advised that one should be prepared for correction after such a strong rally, though there are many positive factors driving the stock prices.
The market rallied more than 50 percent in last one year. Do you expect similar kind of return in the next one year?
While we have seen recovery in both corporate earnings and economic activities, bulk of the returns in the equity market in the last year or so has come from high liquidity and record-low interest rates. As long as liquidity remains high and rates remain low, markets can remain buoyant. Earnings visibility with estimates of over 25 percent growth for Nifty EPS in FY22 and another 15 percent in FY23 provides comfort. Valuations at almost life high of 24x one-year forward has very little room for more upside. Though there are many positive factors driving stock prices, one should be prepared for correction after such strong rally.
What is your overall reading of this run-up in stock prices? Have you changed your earnings estimates for FY22 after some of the IT biggies came up with their September quarter numbers?
There is no major in change in earnings estimates for FY22. The NSE IT Index is up 49 percent this year. It’s now trading at one-year forward PE of 30.8x – a premium of 77 percent to its 10-year average of 17.4x. Additionally it’s also trading at a premium of 35 percent to Nifty versus 10-year average of 6 percent. The key positives for the sector has been – strong deal pipeline and revenue visibility as companies across the world are spending more on digitisation.
Covid reversed the trend of higher onsite work to offshore, which is more profitable for Indian players. However, supply side challenges and attrition are expected to impact margins. Overall earnings growth is still expected to be in the mid-teens. High valuations are discounting lot of near-term positives and there is no scope for disappointment. We remain positive on the sector considering structural growth drivers.
What about the primary market with so many big-ticket listings lined up? Do you think the second half of the year would outgrow the first half in terms of funds raised?
The IPO line up is huge and if the current positive environment continues, then one can expect a very healthy fund raising via IPOs in the second half of 2021-22. However, investors should keep in mind that it has become a seller’s market. In many cases, either businesses are mediocre or valuations are demanding. Lot of these IPOs are from companies which are hardly making profits.
Do you feel the inflation worries on rising oil price, and higher US bond yields on expectations of beginning of Fed tapering in November 2021 could spoil the party?
The WPI inflation rate fell to a six-month low of 10.66 percent in September from 11.39 percent a month ago. However, this was the sixth straight month of double-digit inflation – first time in 23 years. Consumer inflation continued to be low at 4.35 percent in September 2021 – the lowest reading in five months, remaining within the RBI’s 2-6 percent target range for the third month in a row. It’s because bulk of the CPI inflation weight is food where inflation is low.
Inflation can spoil the party only if the Fed takes decisions in a haste, increase the pace and timing of tapering, and leads to rate hikes.
SIP inflow crossed Rs 10,000 crore in September. Do you expect the flow to remain above this in the coming months?
Difficult to state in the short term, but yes, with around 3 percent of total population investing in mutual funds, the upside potential in multi-fold.
What are the sectors you are upbeat about? And, where should the investor be more cautious?
We are positive on structural themes like digitisation, financialisation, consumption and healthcare. We are overweight on Industrials, IT and healthcare. We are underweight on consumer staples and financials.
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