The Hindu Business Line : `There are a few stray areas representing considerable value'

Kolkata May 27 With India's potential earnings growth, the current crop of valuations is justified, feels Mr Dinesh Thakkar, Chairman and Managing Director, Angel Broking. Excerpts.

All sorts of sectors currently see stretched valuations. Are we not quite fairly valued in relation to some other markets?

While we do not wholly agree with the premise that all sectors are necessarily witnessing stretched valuations, we do agree that most are fairly valued. However, there are a few stray areas representing considerable value. Take, for instance, public-sector banks, which are trading at 1.3x to 1.4x their price-to-book value, and offer ROEs above 17 per cent.

The point is, India is not necessarily overvalued in relation to other emerging markets. If we were to study China, for example, we would find that it trades at a P/E of around 35x, whereas we trade at around a 17x multiple.

Additionally, our companies have higher capital productivity and our GDP growth is more or less consistent with China's. Although we are surely not stating that the Indian market immediately deserves a similar multiple, we feel that, with our demographic factors and potential earnings growth, the current valuations are justified.

What are the possible risks at this moment?

The major worry is the possible appreciation of the rupee beyond 40 to the dollar. This could adversely impact valuations of quite a few sectors, including IT, which, with a 20 per cent weighting in the Sensex, could negatively impact overall sentiment. In addition, business and profitability of areas such as textiles could be hit hard by such an appreciation. However, we expect RBI to intervene in such a situation, at least until such time as our major competitors, including China, revalue their own currency.

Given that the market is almost at its all-time high, should there be more defensive allocations?

We would advise investors to go overweight on PSU banks. We also favour pharma. However, we are currently underweight on commodities, mainly cements and metals. These have had a good run for the past two to three years. Nevertheless, they are currently earning unsustainable margins. We expect companies to be aggressive in their expansion, hence stretching supply far above demand.

What sort of differentiators can be expected in the broking industry in the days ahead?

The investment community in this country is growing at a healthy rate due to increasing investible income in the hands of investors. But due to lower per capita income, this is too broad and widespread.

Another problem is that public awareness of investing in the market is very low. To serve this community effectively, I believe it is vital for brokers to create good research desks, invest in technology and use effective tech platforms to disseminate investment options through a proper advisory service. I do feel that proper awareness programs, coupled with high investible income in the hands of the youth, will expand the retail market.

I also see huge opportunity in this space - I am referring to the non-institutional segment. Retail brokerages will need to focus on their core business model.

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