The markets are a little jittery again because of geopolitical tensions. Not only Iran and Israel, now the US also has entered the fray. How do you see the markets playing right now and what is your take on Indian markets?
Jigar Mistry: Geopolitical tension aside and I will come to that, until September 24, if you take a long-term CAGR of three years especially in the smallcap index, the share prices were moving way ahead of fundamentals. By February, you had essentially a situation where the smallcap index corrected 25% and that resulted in a reasonably decent equilibrium. However, March onwards, we started seeing a lot of FIIs inflows come through to India predominantly driven by the dollar weakness and that has resulted in the upping of the risk appetite so to speak even within the domestic investors, which again started resulting in a large dislocation, especially in a lot of illiquid stocks.
Coming to your question, the market does not really like any uncertainty, especially one which results in an elevated crude movement, and that is where India is really vulnerable. Because we are importing say 1.4, 1.5 billion barrels of crude each year, a $10 up move is a $14-15 billion hit which is more than the money we would have gotten from the bond inclusion which we are trying so hard for. That is a predominant case which impairs India’s current account deficit, which in turn impairs the interest rates.
Now, if you look at the two policy rates – the US versus the India – then the difference is below 100 basis points, which is the lowest we have ever seen and therefore, anything that impacts India more than the US, which obviously crude price is, has a potentially higher impact relatively speaking to equity valuations and that is where the Street is a little bit worried.
Of course, the prolonged conflict which we are at present witnessing, the Israel-Iran tensions and the bigger economy is also interfering now, could stall global growth. But what is the stance for a domestic market like India and where do you see the India play stand – particularly, sector specific approach? At present, if we have to build a portfolio, is India still a buy on dips market and if yes, what are the sectors to watch out for?
Jigar Mistry: What is happening is that India so to speak is a macro darling in an otherwise turbulent market. Almost everything was completely aligned for the Indian macro space. The inflation had started to cool off, your current account was in check, fiscal deficit was tracking completely on track with the next year estimates. Therefore, in a world which is increasingly uncertain, India provided a safe haven status. Therefore, incrementally, views were moving into earnings as well as flows.
Now, we can handle both of them separately, but earnings in 4Q was a reasonably decent reality check. The only divergence we saw was that the sectors where the weights were higher. They were not contributing as sharply to the incremental pat growth of the free float BSE 500. If you looked at the sectors that contributed, they were cyclical in nature and therefore, despite earnings beating consensus in more companies rather than missing, for the first time in five years, we are seeing consensus cut earnings in the runup to the next year. If starting COVID, we saw the consensus continue to raise or at least meet with their initial EPS targets two years out, 2021 estimate set out in ‘19 got met, 2022 got met, ‘23 and ‘24 got met’, 25 also got met. 2026 and 2027 is where we are seeing the earnings cut through because incrementally consensus is not really confident on whether this cyclical revival that India is seeing will be able to push through over the next two years or not. Therefore, the focus moves to flows and within flows, we did talk about how FIIs are incrementally putting in money. DXY, which is the dollar’s gauge against the vast basket of currencies, has fallen from 110 to below 99. If I am a global allocator of capital and I am seeing emerging market versus developed market debate rage on for five years and then shift, I am very weary that the dollar has now started depreciating.
On top of that, I have an incumbent government who is keen on seeing the dollar depreciate even further and therefore, I will be keen to put money into emerging markets and thereby India gets a higher allocation.
Within domestic flows, everything said and done, we are only at around 4% of the household savings coming into equities. Ten years back, it was just 0.7%, but in 1992 in the peak of those markets, we were almost 15% albeit the volume was much lower, but even if this moves up to 10% in the foreseeable future say, three-four years from currently 4%, you are talking of 10 lakh crores of incremental flows coming into mutual funds or equities speaking and therefore, despite earnings getting cut, in places where there is a reasonably decent outlook, the valuations are not correcting in the face of apparent construct that we are seeing.
You are highlighting the financialization of the saving trend shaping up in India. Do you believe that to be a part of this particular trend, can someone look at the brokerage and AMCs and have a long way to go even from these levels?
Jigar Mistry: For us, that is a slightly different view because so often a good product is a good company. It is a seamless transition like say, I wear Titan watch and therefore, Titan as a company is good. The second generalisation that a lot of people do is because the company is good, it is also a great investment.
Our philosophy is pretty much based on cycles and therefore what we pay to buy a business matters a lot to us. Many of these businesses are quoting valuations or when you do a reverse DCF on many of these businesses, you get an implied growth which is in sync with what the markets can deliver. It is not as easy transition but, yes, as a theme it is interesting.