CapGrow Capital Advisors believes 2023 could be a much better year for the equity market as the private sector capex picks up, earnings momentum continues to gain traction and the time and price corrections in the past one year have led to valuations becoming moderate.
The Reserve Bank will hold a special meeting of the Monetary Policy Committee on November 3. “There is a probability of a rate hike of 25 -50 bps could also be announced in the off-schedule MPC meeting to tame the inflation, and considering the high inflation that is there globally,” Arun Malhotra, the founder and chief investment officer of CapGrow Capital Advisors, says in an interview to Moneycontrol.
The market veteran has spent 30 years in equities and stayed passionate in identifying value investing opportunities. Most of the froth in the new-age tech companies during IPO in 2021 has been taken away and is available at much better valuations, he shares. Excerpts from the iterview:
What do you broadly expect from the special meeting called by the Reserve Bank of India on November 3?
The monetary policy framework was implemented in 2016 which mandated RBI to maintain retail inflation at 4 percent with 2 percent deviation on either side. RBI has been unable to contain inflation for the past three consecutive quarters within the band hence it will require to submit the report to the government and lay down corrective action & plans to prevent the deviation.
Further, there is a probability of a rate hike of 25 -50 bps could also be announced in the off-schedule MPC meeting to tame the inflation, and considering the high inflation that is there globally.
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Do you see significant value and growth in public sector banks over private banks?
PSU banks have seen net interest income growth, a decline in NPA provisions, lower credit costs, and impressive return on assets in H1FY2023. There has been a significant rally of up to 50 percent in some PSU banks in the last one year.
We believe PSU banks can trade at 1-1.5x price to adjusted book value. We continue to be bullish on large and a few small private sector banks as compared to public sector banks.
SBI is the largest and is comparable to large private sector banks on most parameters.
After a disappointing 2022, do you think 2023 is going to be a blockbuster for the equity market in terms of returns?
In the last one-year Indian benchmark indices returns as of October 31, 2022 have been fairly disappointing for the investor fraternity with just around 1 percent positive returns.
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We believe 2023 could be a much better year as the private sector capex picks up, earnings momentum continues to gain traction and the time and price correction in the past 1 year have led to valuations becoming moderate.
Nifty PE ratio at 21x is still significantly lower than the 5-year average TTM of 27.1x and slightly lower than the 1-year TTM average of 22x. Additionally, the global headwinds will also reduce by early next year.
What are the themes that are looking attractive enough for investment and can give healthy returns in coming years?
Technology, new age digital companies, companies with a focus on electric vehicles (EV) and components in the auto sector should do well as EV flavour is catching up.
Chemical companies with more value-added products(China+1) strategy, and now Europe+1 should do well. Banks have seen descent growth as credit demand pick up, New age Ecommerce, which represents businesses that sell products and services via the internet, Payment Aggregators, Companies in SaaS, Leadership in Pharma though innovative medtech solutions & IT should perform and post higher growth as they are more leveraged to the changing consumer behaviours supported by rapidly changing technologies.
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Do you think the Federal Reserve will take a pause in rate hikes during Q1CY23 to assess the impact of earlier hikes on the economy and inflation?
We believe in Q1CY2023 US Federal Reserve could pause a bit as interest rates hikes expected to peak at 4.5-4.75 percent by then and Fed would like to see the impact of their actions. Further, higher commodities prices have started correcting; the higher interest rates in the western world will kill economic growth that will get fully reflected in the economic data with a lag of 6-9 months.
The slowdown in the US economy will force the Fed to cool down from its aggressive stance and reduce the pace of rate hikes as further tightening may also have repercussions on the financial stability and the financial system.
Hence, again slow quantitative easing would once again lead to ease of liquidity globally, especially in the US which has been the “Mother” of the previous bull, markets and will lead to a post-rub-off effect on other emerging economies including India.
Are you super bullish on the defence space as the manufacturing has gradually been shifting to India?
As per 2021 estimates, India spent about $ 77 billion and has emerged as the third-largest military spender in the world, amounting to about 3.6 percent of global expenditure. In last 4 to 5 years, a major shift in defence procurement policy by the Modi Government was designed to make India the defence manufacturing hub of the world.
Major policy tweaks were intended to reduce the defence import bill, modernize infrastructure, achieve ‘Atmanirbharta’ in manufacturing and promote defence exports which have driven a gradual shift towards increasing indigenization.
We will continue to evaluate companies and invest in the defence space if it fits in our investment matrix. There has been a significant rally in defence space companies aof late that supports the above high growth thesis.
What is you take on the new age tech companies like Paytm, Nykaa and Zomato, which saw significant selling pressure?
Most of the froth in the new-age tech companies during IPO in 2021 has been taken away and is available at much better valuations. Some companies are looking to be profitable in next 3-5 years and provide interesting investment opportunities along with niche leadership in their respective businesses.
The fall in price by more than 40-50 percent merits attentions. Companies like PB Fintech and Zomato have a clear visibility leading to profitable growth in few years through scalability and rationalising their unit economics.
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