Post budget rally in benchmark equity indices has been a record of sorts this year at over 10 per cent, the highest so far this millennium. Such valuation could now become the new normal given that the heady mix of liquidity gush, rebound in the third quarter corporate earnings and pro-growth budget has reset the valuation expectations of the markets with a bullish outlook, said Dhiraj Relli, Managing Director & CEO of HDFC Securities, a full services brokerage house, in an interview with BusinessLine . Excerpts
Do you think Indian benchmark indices are at bubble peak zone?
We have to look at valuations from a different perspective. Long term averages though may indicate that we are in a high valuation zone. But if we look at recent trends, I do not believe we are on a bubble zone.
The average P/E multiple of the Sensex over the past 28 years stands at 16.5 times; however, the average for the last 10 years is 19.5x. It is currently trading at over 21x FY22 PE. While this is expensive, considering historical trends, it’s likely to sustain at higher than the past valuations, bearing in mind liquidity premium and earnings upgrade expectations, unless there are macro downgrades.
Perhaps this will become the new normal level. We have to accept this and move forward at least for the next few years.
Is this perception coming from Q3 rebound in corporate earnings or because you feel the recent gush of liquidity will persist?
It is both. As long as interest rate is low and globally synchronised monetary policy will continue to pump in more and more funds, the FPI inflows gush will continue. We do not see any reversal in liquidity in near term. As far as earnings growth, this growth in earnings coming post Covid19 is on the bedrock of policy reforms done in last 4-5 years. In last five years, corporate earnings CAGR between FY’15 to FY’20 was just over 5 per cent. However, we believe corporate earnings growth for Nifty companies between FY’20 to FY’23 will be much higher at 21 per cent. Earning expectations have moved up post Covid19 due to several reasons including budget announcements on capital spend and GST system having got stabilised.
After Budget, markets have seen a rally of 10 per cent, which is a record of sorts in last two decades. Do you see this exuberance sustaining?
To some extent, the markets are on an over bought zone. The 10 per cent rally post budget can be attributed to budget announcement where government has spelt out intent to look to finance fiscal deficit through alternate methods such as privatisation rather than using the tried and test method of higher taxation. This was a pleasant surprise. You also need to factor that due to fear the markets had slid about 5 per cent ahead of the budget.
Do you then see an upside from here in Nifty or Sensex by end December 2021?
We believe the upside from here is somewhat limited. We can expect 5-7 per cent returns from the current levels when we are looking at end December. We may end up with Nifty between 15,750 and 16,000 kind of number.
Where do you see value in the markets this year?
Indian stock markets are now a stock picker’s delight. You can easily create a portfolio that can generate an alpha. There will be more upside in midcaps and small caps than broad indices level. Midcaps and small caps have been rank under performers in the last three years.
Now post Covid-19 period, there is some catching up and we do expect lot more from that midcap and small cap space because earnings growth potential is significantly higher for such companies.
Which are the sectors you expect to do well in the markets this year?
In 2021, the erstwhile neglected sectors – essentially cyclical sectors – including Banks, Materials (metals, cement), Capital Goods, Infrastructure could do well. The defensive sectors may also perform intermittently. PSU as a theme may do well if the promised unshackling and sell-off in the space starts early and in the right earnest. We do believe PSU banks could be a dark horse. Select PSUs that are divestment stories could do well. Both life and general insurance could be a good opportunity. Large IT players could be a stable and low double digit kind of bet. We don’t have clear visibility on pharma side as of now.
Are there any plans to go public and look at listing for enhanced visibility?
No. We are not looking at listing or going in for IPO now. We are very comfortable on the capital front. So technically there is no need for us to look at an IPO.