Market valuation is challenging, but long-term growth prospects intact: Vinay Pahria

“But at this point, from whatever data and commentary we’re getting, we see some softening in overall corporate earnings growth in FY25,” says Vinay Pahria, CIO, PGIM India MF.

Markets have been very volatile for the past two months. There were many reasons behind it. It was poor earnings. Valuations were expensive. There were outflows. But how is the market looking at this current time? Are earnings expected to increase from the third quarter? Is the valuation now fair after the correction? How are you looking at the markets?
Vinay Pahria: Therefore, you need to segment the overall market scenario from a near-term and a medium-to-long-term perspective. If I look at the markets from a near-term perspective, clearly, there are challenges. We are seeing a slowdown in earnings growth. It got off to a remarkable start in the second quarter and the early signs for the third quarter of this year don’t look very promising either.

Also, valuation, as we all know, valuation is not very attractive. They are not cheap, especially on the mid and smallcap side. So, the near term looks a bit challenging.

However, if we look at it from a medium to long term perspective, clearly, India is one of the fastest growing countries in the world. This is being reflected in corporate profitability growth in the medium-to-long-term perspective.

And from that point of view, even if I am an investor with a reasonably long-term investment horizon, India presents a reasonably attractive opportunity. Of course, there are challenges, bubbles or micro-bubbles, but overall the market looks good from a medium-to-long-term perspective.

So, are you also expecting earnings in the second half of this financial year because it is quite contrary to what other market experts are expecting? They are expected to do better in the second half, although capital expenditure is expected to increase. It was festive season and rural demand was also increasing.
Vinay Pahria: So, that is the current hope. We don’t want hope as a strategy. If we look at the current trends, clearly, trends seem to have softened in the second quarter. We have seen significant downgrades in many earnings. For example, consumption baskets have seen a significant decline.

Overall consumption weakened in the second quarter. In the third quarter, as I said, from the early indications that we see, for example, some companies have given mid-quarter guidance. Auto numbers are not very healthy. So, net-net, we are not seeing very significant signs of any pick-up in economic activity. And so, we cannot pin our hopes on the hope of a pickup in the second half and so, we will monitor the incoming data. But at this point, from all the data and commentary we’re getting, we’re seeing some softening in overall corporate earnings growth in fiscal 2025.

But then what strategy are you following in terms of sector calls because you’re saying that earnings are expected to be weak, what are the sectors that you think are likely to be priced in and therefore provide a reasonable risk-reward opportunity?
Vinay Pahria: So, we have seen a huge difference in the market in the last one year. In particular, if we look at the very long-term history from two decades ago to about last year, we saw that companies that were high-quality businesses and high-growth businesses had significantly outperformed the overall market. . . However, over the past year, we have seen all these companies significantly underperform.
And so, the valuations of these high-growth and high-quality companies are still reasonable and that’s an area where we’re significantly focused. We think there are opportunities in the high-growth, high-quality basket and that’s a niche. Where we think that is likely to deliver significant outperformance in the near to medium term.

So, what are those high-growth, high-quality areas? I mean, are you looking for these opportunities in, let’s say, the banking sector? Are you looking for this opportunity in Pharma? In what specific areas are you looking for these high-growth, high-quality opportunities?
Vinay Pahria: So, in general, these are scattered in different areas. But there are clearly certain sectors where these companies have a higher concentration. For example, clearly, healthcare is a sector where we see an abundance of companies that are growing at a fast pace, that have very high-quality businesses. There are private sector banks, which we find very attractive, so financial. There are many IT and product companies that we find very attractive. So, these are usually the areas where we think there are a lot of attractive businesses. Of course, telecom is another sector where we find a presence of high-growth, high-quality businesses. So, in general, these are the areas where we focus, we are overweight in our funds, and we think there are good opportunities in these areas even in the near and medium term.