Sonam Srivastava, founder of Wright Research, says looking at the unadjusted PE (price-to-earnings) ratios fundamentally, the Nifty has come back to 23 after a peak of 30 in October. In an extreme worst-case scenario, the Nifty will find support at 20 PE, at about 15,000, but this is extremely unlikely, she said in an interview to Moneycontrol.
Factors that could play spoilsport for earnings growth are a potential third Covid-19 wave, rising oil prices, a sustained rise in inflation, higher domestic interest rates, and accelerated tapering by the US Federal Reserve, said Srivastava, a quantitative investment management and trading professional. Edited excerpts:
Q: Is the momentum in the markets strong now after the recent correction? Can the Nifty 50 cross 18,000 in the coming week? Fundamentally, what is the best support level for the Nifty if a sharp correction begins again?
The Indian market, overvalued a month and a half ago, saw FIIs leaving in bulk volumes in November and went through a correction of almost 10 percent. However, recently Morgan Stanley has given India a fresh ‘buy’ rating. India is attractive because of the structural uptrend with a likely new profit cycle, supportive policy, rise in fixed income flows, robust primary market, and low return correlations with the world.
The market is jittery at the moment and unless FIIs stop selling, it is tough to call the continuance of momentum. However, the rerating by Morgan Stanley and supportive policy announcement by the Reserve Bank of India are potent triggers that could keep the momentum going. Still, global volatility levels are high due to the Omicron scare.
Fundamentally looking at the unadjusted PE (price-to-earnings) ratios, the Nifty has come back to a PE ratio of 23 after a peak of 30 in October. Pre-pandemic, the index stayed at 24-28 PE levels and current earnings expectations are much better than before, unless the downside might be limited. In an extreme worst-case scenario, the Nifty will find support at 20 PE, around 15,000 levels, but this is extremely unlikely.
Q: Economic growth pace has picked up in the past several months, which is one of the key supportive factors for the market. What could moderate the economic growth pace in 2022?
Low credit rates support robust economic growth in India and a pro-growth policy is a key reason that makes India attractive. And in the high-liquidity global environment, India has been able to command a reasonable valuation.
Factors that could play spoilsport for the Indian earnings growth pace are a potential third wave of Covid-19, rising oil prices, sustained rise in inflation, rise in domestic interest rates, and accelerated taper by the US Federal Reserve.
Q: Do you think India’s PE premium to global equities is already high and hence further PE expansion may be unlikely?
India’s PE ratio of around 23-24 right now is higher than emerging market peers, which are trading at a PE ratio of 8-15. The US markets, which are also richly valued, are trading at a PE of 20. India is also the fastest-growing economy of the last year and has very strong 9 percent-plus projections of GDP growth, which makes it attractive.
The valuation multiple is governed by global liquidity, highly dependent on the US Fed taper decision. If the taper does not come early, there will be liquidity in the Indian market and if banking and industrials pick up the pace, we could see some PE expansion.
The earnings to be announced in January could also ease the PE multiple and give prices scope to grow. Similarly, the annual Budget in February is a good trigger for expectation revision.
Q: What are your broad expectations for the November consumer price index inflation?
CPI inflation could tick higher, with the consensus estimate being 5.1 percent against 4.48 percent inflation in October. The higher projection is primarily because of high core inflation – the non-food, non-fuel inflation component – and global commodity prices. The RBI governor has also estimated in his policy address that the number would be 5.1 percent. He estimated that inflation would peak in the next quarter and ease after that. Therefore, my general expectation of November CPI inflation would be 4.9-5.1 percent, and if the number beats expectations, it could be a positive.
Q: What would be your favourite pick among IPOs from Metro Brands, Medplus Health, Data Patterns and HP Adhesives and why?
Also read – Astha Jain of Hem assigned subscribe rating to Metro Brands, MapmyIndia, Medplus, Data Patterns IPOs – here is why
The most attractive is Data Patterns. Data Patterns is a small IPO in the defence sector, trading currently at plus-70 percent grey market premium, which is extremely attractive because of: a) track record of profitable growth, b) being a strategic defence and aerospace electronics solutions provider and c) innovation focussed business model and healthy order book
Medplus Health is the second-largest pharmacy retailer in India with a firm brand name and customer value proposition. Medplus Health also commands a hefty grey market premium.
Metro Brands is one of India’s largest Indian footwear specialty retailers, which has a strong history of profitability and growth and is an excellent long-term hold. HP Adhesives is an adhesives and sealants company with a small presence in the market dominated by Pidilite.
Q: Tega Industries, Anand Rathi Wealth, and RateGain Travel Technologies make their debut on the bourses next week. What could be their listing premiums? What should investors do with these stocks after listing?
Also read – Medplus Health IPO opens: 10 key things to know before subscribing to the public issue
This year, Tega Industries became the third most subscribed public issue after the two biggest IPOs and should list at a hefty 70-80 percent premium, based on grey market rates. Kolkata-based Tega Industries offers comprehensive solutions to marquee global clients and is an excellent long-term hold.
Anand Rathi Wealth is trading at a grey market premium of 20 percent and should give good listing gains. Anand Rathi is an extremely attractive company in the lucrative financial intermediary space and investors should hold this after allotment.
RateGain is commanding a grey market premium of 30 percent. RateGain is among the leading distribution technology companies globally and the most extensive software as a service (SaaS) company in India’s hospitality and travel industry and would be an attractive stock when the economy reopens. Therefore, investors should hold this after allotment.
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