Sahil Kapoor is the Head Products and Market Strategist at DSP Investment Managers
The sheer volume of market-moving news flow that has confronted investors over the past few weeks can be overwhelming for even the most weathered market participants.
If it’s not the US Federal Reserve’s aggressiveness in tackling inflation, then it is the possibility of Credit Suisse triggering a global financial meltdown. If it is not China’s property sector bust, then it is the threats of a nuclear Armageddon by Vladimir Putin’s Russia.
But in the chaos of market-moving noise, Kapoor has found calmness in one thing ? his faith in the earnings growth prospects of Indian companies.
“We took a very simple view: What is the average earnings growth that can happen in India over the next three to five years? I think, over the next three years, it’s fine to assume that we can see earnings growth of between 12-15 percent,” Sahil Kapoor of DSP Mutual Fund told Moneycontrol in an interview.
The head of products and market strategist at DSP MF is not perturbed by the macroeconomic chaos, given that he sees India’s corporate sector coming through on their earnings promise that had eluded investors for the better part of the last decade.
But, how does Kapoor plan on turning his belief in strong corporate earnings into investment action?
“So, I started adding about 20-25 basis points from my cash position to equity positions every day when the index dipped below 17,000 points. Very simple strategy, it’s no rocket science,” Kapoor said.
Essentially, Kapoor’s strategy is what new-age retail investors call ‘buy the f*cking dip’ or BTFD, which is driven by the belief that the market will eventually turn higher and every dip or correction is an opportunity to buy stocks or the market at a lower price.
The veteran strategist believes investors should watch out when the Nifty 50 drops in the 16,500 and 17,000 zone, because that will be the level at which you will be able to make at least 12 per cent returns over the next two years since the Nifty 50’s aggregate earnings per share (EPS), will grow by 12 percent in that time.
“So, we said that if Nifty 50 goes in that range, you start increasing your equity allocation,” Kapoor added. Edited excerpts:
A lot has been done and said about the outperformance of Indian market in 2022. Do you expect this outperformance to last over the next 12 months?
Kapoor: I don’t know how to measure outperformance. A lot of people measure outperformance by the year-to-date (YTD) returns. I think, the Indian economy and the stock market are the third-best performers in USD terms globally over the last 30 years; so we are outperformers.
Secondly, when you look at short-term indicators, we are at a 90 percent premium to emerging markets. Why are we at a premium? Nobody asked. We are at a premium because other markets have gone completely out of whack. They have fallen so much that they have become cheaper. It’s not that we have become overtly expensive and they are still trading at their average valuations. India’s expensiveness versus that of its peers is not because we have done something dramatic; it is because those markets have become dramatically cheap.
The third important point is that if corporates are able to do earnings growth of 12-15 percent, I think our market should be able to do well. If, at the same time, other markets begin to see a catch-up in their earnings, they will start to outperform us. But that does not mean that you should not own India.
You reckon India will always be an expensive market to own?
One of the things, which I feel, favours India is the democratic-capitalist system. There are very few countries which have three pillars merged together: democracy, capitalism and scale. These three things are absent in many emerging markets.
And when you mix it with another force, which is a very large consumer base, you will not find many countries in the world that have this kind of a set-up. I don’t have any idea why this premium that India enjoys should persist if other countries offer you better value because everything at the end of the day is about value. If we become overtly expensive, we will return to long term average valuations.
Your recent newsletter had a large chunk dedicated to India’s consumption story. We are at $ 2,000 per capita at this moment. How high can this go in your opinion, and which sectors will be beneficiaries?
When I look at global growth, I don’t look at countries. I don’t think the world is growing like that; the world is growing in terms of urban agglomerations. The world is growing in terms of a Mumbai or a New York or a Hong Kong. These are the cities which are growing, and many people who live in these cities, they talk very similarly, they consume similar stuff, and their lifestyles are very similar.
When you look at this construct and then when you look at India, India has between one crore to three crore families who drive the largest amount of consumption. This number, I think, will reach about eight crore families by 2030-32, which will become the largest consuming class in the world. I think, that is how India’s consumption story will move.
We don’t need to figure out where these urban agglomerations are coming up, but the companies that we invest in, need to. I think, there are many companies which are doing that. They are spreading out to areas where there is a slightly stronger growth than only the current urban agglomeration. We’ll have more such cities, and I think, that’s how the country progresses.
Is it good for the long-term health of the economy that we are seeing a very divergent employment story emerging in India ? one of the rich getting richer and the poor getting poorer?
When COVID occurred, a lot of people coined this phrase ‘Big becoming bigger’. But I always thought in terms of the ‘weak becoming weaker’, because the bigger companies did nothing to become big. Can this change? Of course, I think it will.
At the bottom of the pyramid, the destruction that we’ve seen, it will slowly repair, but from a longer-term standpoint. I don’t think we have done anything for inequality to reduce over time. In fact, it’s not an India phenomenon. It’s a global phenomenon.
We have created entry barriers, not just in finance. You can see parallels in education. And you can’t break them. I think, these entry barriers will only become stronger as we move ahead and technology makes these barriers even stronger. What I believe is that we will get unified globally in terms of urban agglomerations, which means global urban cities will begin to look very similar, but the inequality between countries will keep on getting wider.
We are seeing a lot of concentration of productive capital at the top of the corporate food chain. How do you assess this situation and what could be the implications for the evolution of a vibrant economy?
I don’t think we are big enough to think about that risk right now. I think, we need very large corporations in India, which are successful and profitable. And even if they are few in numbers, initially, it will be okay. We need companies to become very large employers. We are far away from reaching that stage right now in many sectors. We don’t yet have a technology company, which is 10-15 percent of our market cap, or we don’t even have a single $ 100-billion healthcare company in India, which is very surprising. So, there is a lack of scale right now, but it will get built over time. We are far away from those problems right now; those will be good problems to have when they come.
How are you implementing the thought process in the short and long terms in your investment decisions?
Generally, I look at only one term, which is the long term. We took a very simple view: What is the average earnings growth that can happen in India over the next three to five years?
Let’s go back and look at the worst period, that is, FY2014-19. We had around 1.5-2 percent annualised earnings growth at the headline level. But when you remove the banking sector from that, your earnings growth rises to about 8 percent, which was below the nominal GDP growth rate. Now, BFSI is 38 percent of India’s market cap in terms of concentration. At this time, it is witnessing a credit growth of 16 percent, and are talking of net profit growth of 18-20 percent or higher.
So, a very large chunk of Nifty 50 index (BFSI stocks account for over 35 percent of the index) will be able to deliver 12-15 percent earnings growth going forward. Secondly, the India-focused businesses, for example, automobiles and pharmaceuticals, which were struggling to see any earnings growth, are now going back to pre-COVID earnings level. I think, over the next three years, it’s fine to assume that we can see earnings growth of between 12-15 percent.
So, (you say) Nifty will be able to deliver 12-15 percent returns annually at the end of this 3-year period?
Yes, I think, ultimately the market would have given 12-15 percent returns, that’s quite possible.
When Nifty 50 was at 17,000, we said let’s look at when Nifty’s EPS reaches Rs 1,000. According to our projections, Nifty could do that anytime between March 2024 and December 2024. Now, what is the historical multiple for the index 18-24 months away? It’s around 16-17 times.
Now, when will Nifty be available at those multiples? When Nifty 50 falls below 17,000 or in the range of 16,500 to 17,000. So, we said that if Nifty 50 goes in that range, you start increasing your equity allocation, because over the next 24 months, it will be possible for you to make a 12 percent CAGR, based on the earnings growth and the multiple that will be available at that point in time.
So, I started adding about 20-25 basis points from my cash position to equity positions every day when the index dipped below 17,000 points. Very simple strategy, it’s no rocket science. Of course, the starting point is that you already have some equity exposure, these are not investments for people who have never bought equity in their lives, and they want to start investing.
Internationally, what are you recommending your clients at DSP?
One, is that the emerging market will be at the top of the heap, in terms of the pecking order in valuations and margin of safety for investment. Second, it’s the Eurozone where we would want to have some exposure, purely from a contrarian point. And the third and most important thing, is the US market.
When you look at the US market, particularly the US innovation businesses, in the last 13 years they have delivered an earnings CAGR of 15-16 percent, which is higher than any business cohort globally. I don’t see any reason why this may not continue going ahead. The valuation multiples of these US innovation businesses were completely off the charts last year, but they have since seen a sharp correction. If you get these kinds of businesses at 17-18 times multiple, there is no reason for you not to invest. There is no reason why you should skip this market.
I think, there is a case for investing in that market because it continues to have the highest quality and sustainability of earnings. Currently, our strategy is continuous SIP (Systematic Investment Plan), particularly in the US innovation space, in a disciplined manner over the next six months. You don’t know when it will hit a bottom or whether it already has, but I think it has become attractive enough in terms of earnings multiples that you can continue to allocate capital.
(Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.)
