Stock markets haven't been kind to the bulls, the Nifty50 from its peak of 18,600 has lost more than 1000 points and for the first time in November, the Indian markets are underperforming global markets.
To discuss the market dynamics and gain an understanding as to whether the underperformance is simply a passing blip, CNBC-TV18 caught up with market veteran Vetri Subramaniam, Group President & Head-Equity at UTI Asset Management Company Limited.
He said, "Banks have significantly lagged the market in recent times and were the worst hit in the early part of the pandemic. It is an area where we think there is actually significant value now. So from a value perspective, the financials, lenders are a part of the market that we like but we are selective.”
“Our sense is that it has been a story of a bunch of financial institutions effectively, continuously gaining market share by outgrowing credit growth by a margin of one-and-a-half or even 3:1 in their growth numbers. That sort of consolidation will continue,” he mentioned.
'These banks have been proactive this time around in terms of provisioning. They have raised capital preemptively and they are very well placed for the next growth upcycle," Subramaniam said.
Maybe the market is a little bit concerned when it looks at the fact that credit growth for the entire banking sector as the data comes out from RBI is just about 7 percent year-on-year, but if you are thinking about the economy growing over the next three to five years, then it is wrong to anchor to that 7 percent, he noted.
“I am happy that people are in a sense not so pleased with the 7 percent credit growth because it gives us a good opportunity to build positions there for the eventual credit growth that we think will come through. Also, because of the consolidation that has taken place, we think these companies will actually be able to gain both market share and profitability through the next upcycle," he said.
With regard to the market, he believes that valuations are challenging and hence, investors need to moderate their return expectations.
"The most crucial thing to keep in mind is that the returns of the past one year or even over the last 18 months, are not indicative of the kind of returns the asset class can generate over the next three to five years period. So don't hold what's happened over the last year as the benchmark for what can happen in the future," Subramaniam specified.
When asked if there were any dangers to the rally in terms of a very precipitous fall, he said, "There are two ways to think about this. One is that eventually, valuations by themselves are a reason for markets to correct but the actual tipping point, which then causes the market to correct, could come from anywhere."
He added, "It may not necessarily be precipitous. The market is working off excessive valuations in more than one way- one is the sharp drop in prices, and therefore in valuations; the other is that the market runs up ahead of the earnings numbers and then stock prices stop reacting to the earnings growth and therefore effectively they deflate in terms of valuations by going nowhere, over a period of time. So we don't really know, which of those to actually play out.”
In terms of the tipping points, which could cause that to happen, he said that a lot of those risks are reasonably well known.
"Some of the challenges that our economy as well as the global economy will have to face are well known, which is essentially, the normalisation of both fiscal policy as well as monetary policy, though the mix could be different across economies. That is now reasonably well understood. It is the events which lie outside, let us say, the middle of the range, which are really the big concerns and if you were to think about that, one concern would be what if the Fed, as well as all the central banks across the world, are behind the curve? So that is a tail risk at one extreme," he said.
He further added, "The tail risk to worry about at the other extreme is really that given the events that have happened in China, the slowdown in growth over there, is it possible that the world's second economy actually delivers very weak growth performance and as a result, pulls down the entire growth outlook. Those to my mind, are the two extreme tail risks with very different sort of messages, but those could be the surprises that upset the market."
On new-age stocks like Zomato and Nykaa, Subramaniam said, "There are two ways of looking at them, one is the most common one, which is that all of this is a bubble and as soon as they start to normalise, all the hot air will come out of it. However, when you look at numbers like 1000 PE or 10-11 times the price to sales or 20 times price to sales, what we are missing is that eventually, these are the companies with significantly strong growth prospects and a very long growth runway."
“So, without getting into any individual names, we have to be careful. Therefore, just extrapolating the valuation number and using that as a reason, some of these companies could surprise us in terms of their growth. But I do admit the bar is high. It is not the valuation that troubles but the fact that when I look at the value of the business, if you are ascribing 20 billion 30 billion to the value of the company today, then the kind of ask rate it will have to generate over the next few years is very high. And history has taught us over time that only few companies will manage that,” he said.
"Even if there are 20 of these consumer tech businesses out there, and all of them are getting the benefit of these valuations, it would not surprise me if 10 years from today, we discover that out of that basket of names, only one or two actually deserve them but that is something that we will discover over time. As of now, we are trying to understand how these business models actually evolve," Subramaniam mentioned.
He further said that they have bid on some of these names like Nykaa, Zomato, Policybazaar, and in all of those they were among the anchors.
On IPOs, he said, "We are dealing with a flood of IPOs and it is not easy for your team to crunch through 24 companies, go through the DRHPs. So, we have been very selective in terms of the IPOs that we chose to participate in. But these exposures as of now are below 1 percent of the portfolio exposure."
For the full interview discussion, watch the video