Anil Sarin is the CIO at Centrum PMS.
One has to look at mid-cap and small-cap space individually, instead of focusing on headline valuation, says Anil Sarin of Centrum PMS as many sectors and segments are in a growth phase and their valuations still appears favourable compared to their medium-term earnings growth potential.
The Chief Investment Officer at Centrum PMS with over 25 years of rich experience in fund management expects overall private capex to be strong over next 2-3 years, due to rising/peaking capacity utilisations, improving demand visibility and comfortable balance sheets.
He believes India offers higher growth than other emerging markets (EMs) and therefore current valuations don’t seem to be very alarming to us. On the valuations front, the Nifty is trading at forward PE Of 20.6x which is roughly 0.5 standard deviations above mean.
Excerpts from an interaction with Moneycontrol:
Do you expect healthy pick up in private capex in coming quarters after a break of several years?
We do see early signs of order uptick for capital goods companies. Although, adjusted for commodity price inflation, the evidence is as yet inconclusive on the private capex upcycle.
We expect overall private capex to be strong over next 2-3 years, due to rising/peaking capacity utilisations, improving demand visibility and comfortable balance sheets. Major capex intensive sectors like steel (& other metals), power utilities, cement, telecom and oil and gas have announced multiple expansion plans to be implemented over next 2 years. Production-linked incentive (PLI) led capex should also kick in from FY23 onwards.
Are you constructive on the equity market when the globally we have lot of uncertainty? Also are we reasonably valued now?
Global uncertainty is led by high commodity inflation and fear of recessions in the US and Europe.
Despite concerns, India Inc posted resilient Q1FY23 with better-than-expected growth and relatively decent margins across most sectors. On valuations front, Nifty is trading at forward PE Of 20.6x which is roughly 0.5 standard deviations above mean.
India offers higher growth than other emerging markets (EMs) and therefore current valuations don’t seem to be very alarming to us.
Is it the time to bet on midcaps despite high valuations or small-caps which are reasonably valued compared to large-caps?
Over the years, mid-cap valuations (price-to-book value or P/BV) have inched up and now similar to large-caps (0.9x P/BV of large-cap). We acknowledge the gap being compressed between midcap and large-cap valuations.
We believe that one has to look at the mid-cap and small-cap space individually, instead of focusing on headline valuation. Many sectors and segments (some mid sized lenders, affordable housing snf finance companies, express logistics, QSR companies, hospitals and auto sector) are in growth phase and their valuations still appears favourable compared to their medium term earnings growth potential.
Do you think one should start looking at new age tech companies that are still far below their issue prices?
We see two set of challenges with new age tech companies – 1) where the business model is strong and growth runway is long, the valuation appears full and 2) Quite a few businesses (e.g. – Paytm, Zomato) are still struggling with higher customer acquisition costs and limited visibility on timeline of profitability. We would wait for correction as current valuations are not appealing enough.
The leading new age techs trade between 8-13 times sales and most have yet to show a profit. Older consumer companies trade between 4 and 10 times sales, growing quite slowly, but with excellent profitability ratios. That is the choice we’re trying to balance.
Are you worried on the FMCG space as we have not seen enough rains in several parts of the country which can impact rural income?
Q1FY23 was tough for FMCG companies with single digit volume growth. On monsoon, pan-India rainfall till last week has been around 8 percent above normal but it remains deficient in a few large rain-fed states of UP, Bihar, West Bengal, Jharkhand and Kerala. This has impacted sentiment as acreage in few crops is down by 10-20 percent.
Rural demand could lag urban demand for the FMCG players Q2/Q3 impacting topline of FMCG players. However, we expect improving margins in 2H – as major commodities like crude and palm oil have corrected around 33 percent and 53 percent respectively from their peak indicating that broader inflation probably has peaked out.
Do you think FIIs are really looking confident enough about India story now despite weak global environment, considering the reversal of funds in last few weeks after the consistent outflow in previous 10 months?
Despite weak global environment, Indian corporates can deliver higher growth in this decade versus previous one. India has always been an expensive market, but this is justified due to attractive historical stock returns and higher earnings growth. Given it’s manufacturing base and entrepreneurial class, India can be an attractive destination for customers looking to replace China as their sole supplier.
India also offers political stability at a time of instability and /or poor economic decision making amongst most emerging markets.
Moreover, Indian stock market has much lesser volatility compared to large emerging markets (EMs) like China and Brazil. This adds to India’s relative attractiveness.
What are the general parameters you consider before making stock investment decisions in smallcaps and midcaps?
We focus on growing businesses with potential for high return on investment.
We have developed a proprietary framework called “EDGE”. We emphasize on “E” – Earnings Quality, “D” – Deep dive research, “G” – Governance and “E” – past track record of superior execution.
We look for strong business model, management delivery capability, durability of moat and market share, consistency of return ratios and large size of opportunity. This approach has helped us in identify many multibagger ideas.
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