Manishi Raychoudhary on the factors that will define the market in the next few months

“If I look at, let’s say the Sensex or the Nifty, they are trading at around 24 times one-year forward PE, which is 15% to 20% higher than the long-term average. In small and midcaps, the valuations are there. Much more severe. ,” says veteran investor Manishi Raychowdhury.

What could really be a red flag there is because when the markets are extremely ready to absorb that outsized Fed rate cut, but then you’ve also got the US election and the swings and forecasts are really all over the place. And then, of course, I mean, frankly, it’s an overinflated market. It may very well fall under its own weight and the reasons may just follow and I am talking globally, that includes India. What do you think are the big events that are going to really decide the markets over the next few odd months?
Manishi Raichoudhary: Geopolitics is undoubtedly a factor that we have to keep an eye on. There are two major conflicts around the world. America has an election. Even though the economic policies are not very different. In the event of a Trump presidency, one could see tax cuts for corporates and therefore more debt being taken on, which itself carries a risk of sorts. But apart from geopolitics, if I look closer to home, Indian valuation still does not inspire confidence especially among foreign investors.

If I look at, let’s say, Sensex or Nifty, they are trading at around 24 times PE in a year, which is 15% to 20% higher than the long-term average. In small and midcaps, valuations are even more formidable. We have seen some IPOs that have come up where it is difficult to fundamentally justify the kind of massive subscriptions that they have. It tells me that there is a lot of money going around, but not enough investment avenues.
I think this phenomenon of IPOs, the boom in IPOs, and on top of that the promoters selling their stake not only to domestic promoters, but also potentially to MNC, multinational company promoters, are some of the examples that are happening now.

Hence, this may increase the equity supply in the market in the near term. In the long term, I am not worried about this because this phenomenon of local money coming into the equity market, it has started in the last two or three years.

If you look at the total volume of investment in India, local savings, the monthly SIPs in mutual funds are around $3 to $4 billion, but the number could be much higher compared to what we are seeing now.

So, in the long term, I don’t see the equity supply issue as a major constraint. In the short term, it may lower valuations, perhaps resulting in some sort of what we call a time correction that would not actually be a bad result.

If valuations moderate as a result of timing corrections, if other Asian markets go up and we see that in China, Greater China, then the valuation gap between India and the rest of Asia will narrow and that is a great result. It is a great result in terms of foreign investors getting excited to reinvest in India.

Given that we are talking about many of these triggers, the traction we have seen in the primary markets cannot be ignored. The type of IPO pipeline has also been very strong. Have you noticed in recent listings that we’ve seen, when the valuation is reasonable, what kind of valuation is attributed to this, what is the opinion?
Manishi Raichoudhary: Well, I won’t comment on specific examples, but some recent examples, very small companies attracting huge valuations, leaving almost nothing on the table for investors, but being oversubscribed hundreds of times, are a bit alarming.

And we’ve also seen that some of these companies that come to the market, successfully manage their IPOs, share prices drop significantly and that’s not really an outcome that excites retail investors. Therefore, it is always beneficial for an IPO-ing company to leave something on the table for the investor. Right now, we’re not exactly seeing that trend, but it’s clearly a desirable outcome if it happens.

What are the pockets that you feel are overvalued and the story is over now? Of course, you’re seeing some underperformance from metals due to global factors, which could very well change. It already is, perhaps. But any pockets where you feel the story is done with and you don’t want to touch it because of the growth story or valuation?
Manishi Raichoudhary: Well, the most notable in terms of output is in defense and other related sectors, there are also some public sector companies that have appreciated significantly in the past few months. I’ll also talk about consumer staples, specifically some of the frontline consumer staples companies.

Many of them are trading anywhere near 40 to 60 times PE with potential earnings growth that doesn’t really justify those kinds of valuation multiples. Therefore, it is the most obvious overvalued pocket. If one looks at the undervalued pockets, at least the sectors that are fundamentally sound in the long term, but have underperformed in the near term, private sector banks come to mind, though earnings growth is likely to slow, I think. Underperformance may have been a bit overstated there.

So, to invest in India right now, one has to be careful, one has to be very selective, one has to look at it through a microscope, but there are pockets of significant value availability and it helps that India is a market where the distribution of sectors, almost 8 to 10 important sectors that investors can choose from.