Investors must temper return hopes after stellar equity run: Jaipuria

He shares that his focus remains on finding companies that fit their 'U's' philosophy - undervalued, underowned, and undiscovered

The Sensex and Nifty reached new milestones of 85,000 and 26,000, respectively, last week. In an email interview with Puneet Wadhwa, Jyotivardhan Jaipuria, founder and managing director of Valentis Advisors, shares that his focus remains on finding companies that fit their ‘U’s’ philosophy — undervalued, underowned, and undiscovered. Edited excerpts:

Will Indian equities outperform their emerging market (EM) peers, given current central bank policies?
 

After a stellar run in equities over the past few years, investors need to tone down their return expectations. At current valuations, we may see both time and price corrections, with increased volatility in equity markets compared to recent years. That said, the longer-term outlook for equities remains positive. Our fiscal and current account deficits are in check, and lower oil prices are a positive factor.

India is poised to be the fastest-growing economy in the world in the coming years. A drop in US Federal Reserve rates will benefit all EM equities, including India.

Globally, investors are particularly optimistic about India. However, in the short term, India’s relatively high valuations (with an 85 per cent P/E premium over other EMs) could lead to better performance from some underperforming EMs.

What’s your current market positioning?
 

We continue to see positive inflows into our portfolio management services (PMS) products. While markets are expensive, the longer-term prospects are bright, and we expect healthy returns in equities over the next few years. We remain very focused on valuation, with our portfolio’s forward P/E at a reasonable 15x. Additionally, we are staggering our investments to retain some ammunition for any market dips.

Could China’s stimulus reduce India’s attractiveness?
 

The general consensus is that India is a secular, long-term growth story. While regulatory issues, such as the capital gains tax hike, are minor irritants, the combination of India’s relatively high valuations and recent outperformance is causing some caution. China’s proposed stimulus could trigger a short-term rally there, which would help reduce India’s valuation premium relative to other EMs. Foreign institutional investors are underweight on India, but we expect flows to pick up as the valuation gap narrows.

Which sectors or stocks appear overheated at current levels?
 

At current valuations, all indices are trading at premiums to their historical averages. Largecaps trade around 22x forward earnings, midcaps near 30x, and smallcaps around 20.5x. While overall valuations aren’t in the bubble zone, they are far from cheap. Some premium is justified by our improved macro situation and growth prospects, but we expect a phase of consolidation that will help bring valuations down. While sectors like defence and many small and midsized enterprises have strong growth potential, valuations leave little margin for error.

Do you see value in any recent listings, or would you consider buying if they corrected?
 

Newly listed companies are commanding huge premiums compared to long-established peers with proven track records. We find very few companies among recent listings that look attractive from a valuation perspective. If we look at the share price performance of those listed over the past 12-18 months, most have delivered poor returns from their listing price.

What are your expectations for the July-September earnings season?
 

We expect earnings growth to be low — likely in the single digits or low double digits for the quarter, in line with the trend seen in April-June. Government spending has been sluggish, which has impacted many industries. Banks are facing net interest margin pressure, and automobile sales, especially in the passenger vehicle segment, have been slow. We expect the chemical sector to disappoint, while pharmaceuticals could deliver a positive surprise.

Valentis Rising Star Opportunity PMS focuses on the small and midcap segments. Do you think these segments are overheated?
 

In general, I agree that valuations aren’t cheap. However, this is a vast segment with strong earnings growth, which offsets some of the higher valuations. For instance, we expect earnings growth over the next two years to be around 12 per cent for largecaps and 19 per cent for smallcaps. Our focus remains on finding companies that align with our 3 ‘U’s’ philosophy — undervalued, underowned, and undiscovered — and we still find companies that meet this criterion.

What were your biggest hits and misses in the past year?
 

Our biggest winners have come from the capital investment space, particularly in the water segment through engineering and pipe companies. Pharmaceuticals have also been strong alpha generators for us. Our biggest miss was our low allocation to the defence sector, partly because it didn’t fit into our investment philosophy.