Given the fact that we are now hitting fresh record highs in the markets once again, do you believe that market valuations are now getting a little stretched or do you think it is not that expensive yet?
Abhay Aggarwal: If we look by conventional standards, the valuation is definitely on the high side. I don’t think valuation or index, when we look at valuation, we usually talk about valuation of Nifty index stocks, 50 stocks. Therefore, they are not yet in extreme category.
They are still around 20 times FY26 earnings at index levels. So, I would not say that this assessment is so stretched that there are no opportunities. At the same time, are valuations at a level where you can say with a lot of certainty that whatever you buy will make you money? I don’t think we’re even there.
I think we are somewhere between fair value and expensive territory. So, investors have to do a lot more work now to make money in the sense that they can’t just look at index stocks or they can just look at index funds, but they have to be a little more proactive and look for opportunities. Not part of index stocks or part of flavor of the month stocks to make money.
So, I think there are still opportunities if we move away from broader market valuations, but investors will need to work to find those opportunities now.
So, let’s make it easy for our investors and our viewers then. So, where do you think there are pockets of opportunity in the market? As you said, you need to look away from stocks that are mainly in the index but focus on stocks that can provide value. What pockets of the market do you think have value right now?
Abhay Aggarwal: I will talk about us and what we are doing at Piper Serica. So, our approach is to look for opportunities that are not very popular right now. Some of the sector segments that have disappointed the market for a while have gone through a sideways time correction. But get in at a time when that sideways correction seems to be ending because two things have happened, either the industry has bottomed out and is now recovering or valuations have become more attractive. So, number one of the three sectors that we are quite bullish on right now is insurance and that includes both life insurance, private players in life insurance, health insurance and general insurance. So, not a buy recommendation, but since our model portfolio is so well known, we have three names in our portfolio that are part of this group. One is ICICI Lombard, ICICI Pru and Star Health.
These stocks have already done well for us, but I think there is still a long way to go, given the long-term opportunity that India presents for insurance players. Another space in which we are quite active and have already placed our bets is the agrochemical space.
Again, a sector that has disappointed the markets for a very long time with flat earnings, a lot of pressure from China dumping, weak prices, no pricing power. But that seems to be slowly changing now, but it’s changing because the dumping from China has gone down and some of these companies are getting some pricing power back.
And the third area, again, that we’re quite bullish right now is the pharmaceutical space. We have been investing in largecap since the beginning of the year and we are already seeing some good returns. I think investors focus too much on short-term valuations in pharma stocks, but if investors look beyond FY26 earnings, they will see that these largecap pharma stocks in India, such as Divi’s and Dr Reddy’s, offer tremendous opportunity for long-term value. . Fabrication So, I think these are the three areas where we are seeing exciting opportunities right now.
But interestingly when I look at the sectors on which you are not very positive and that would be banks, NBFCs and IT, what was the reason for that? And also, I will go deeper for the IT sector because from the last few trading sessions, we have seen a good improvement in the IT sector. People believe that now that you have a rate-cut cycle starting from the United States or expected to actually happen, the outlook for the BFSI segment in the United States will look better, which will help the IT sector. So, what is your take on — one, on the banking space, why is it in an underweight trend for you?
Abhay Aggarwal: Yeah, I’d say that’s a bit of a bold call for us, but that’s coming from the data that we’re seeing at the grassroots level. We see three things happening. For lenders, I would club that segment as lenders, which include large banks, small regional banks and NBFCs. We see three things happening. One is that the cost of deposits is increasing. So, first of all, it is difficult to get deposits, even for big banks with large branch presence that used to handle deposits. They are not so easy to come by. So, what is happening is that the cost of capital is increasing for these banks.
Another thing that’s happening is that the cost-to-income ratio has gone up, and that’s because of higher rents, higher operating costs, and higher salaries. And the third thing is the deterioration in asset quality, especially in the unsecured loan book. If you look at the loan books, some of these credit card players and personal loan providers, besides microfinance companies, there is a clear deterioration in asset quality.
It is not alarming yet, but the trend is not good. Now, some of that is being explained away as a seasonal phenomenon due to the elections and heatwave in the last quarter, but we believe it’s much stickier. As far as payment is concerned, there is tension at the grassroots level as far as ability to pay on time is concerned.
And we would like to see an improvement in storage efficiency especially in the next two quarters to create a more positive outlook. But with these three things happening, it is currently creating a vicious cycle for lenders. And in an environment where Indian banks and Indian NBFCs already trade at probably the highest book value multiples in the entire world, I think investors will soon be asking the question, if these banks are growing in single digits now, what are those valuations? fair?
I think we have a very positive long-term perspective on this segment as it is very important for GDP growth. But in the short term we remain very cautious. We would like to see the metrics improve before we return to this segment.
The IT sector is indeed something we keep a close eye on, isn’t it? Like, we’re talking about it. What kind of signals are you getting with these IT companies? You don’t seem excited at all.
Abhay Aggarwal: I think, again, there is a very large sector and it is a very valuable sector of the Indian economy that has created jobs, that has driven the economy for a long time.
I think this is a segment which is now entering the phase of consolidation. And I think some of these people might benefit from a short-term boost that might come.
I don’t believe in the simplistic logic that just because of a rate cut, banks will suddenly start spending on their IT budgets. You have to look at US banks. They are under tremendous margin pressure. They are being asked to cut costs. And structurally a lot of work is moving towards AI and generative AI, where the cost of doing projects for big IT companies should come down, but it’s not coming down.
So, I’m a little worried right now that the Indian IT industry and this is their own guidance, it’s not something that we’re taking out. But even if we go by the guidance given by major Indian IT companies, they are talking about 0% to 3% top-line growth in the next year at best. Now, with this kind of growth, I don’t understand why we as investors should be willing to pay 25 to 30 times forward PE multiple for a company where the management itself is guiding for very flat growth, no growth or minimal growth. . So my problem is that these stocks look defensive.
They may seem like value stocks. But as a fund manager, if we buy them, we can go for a year or more without making any returns on them. So, again, I’d like to see some positive triggers develop here. I’d like to see management commentary improve when they talk about quarterly results to bet on these stocks again.
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