We've been exploring themes with secular implications: Prakash Kacholia

The strong first-quarter FY24 earnings are expected to normalise in the coming quarters, with a potential growth rate of 20-22 per cent, said Kacholia

Markets have struggled to sustain higher levels amid various headwinds. PRAKASH KACHOLIA, managing director at Emkay Global Financial Services, shares insights with Puneet Wadhwa in an email interview on the road ahead for Indian equities. From a top-down perspective, particularly in a largecap space, valuations do not seem stretched, he said. Edited excerpts:

Markets are unable to hold on to higher levels. Are you advising your clients to cash out?

The market movement over the past three months has been notably intense. Approximately 50 per cent of the equity returns for the past year have materialised in this relatively short time frame.

In such circumstances, it is customary for markets to experience profit-booking after a substantial surge.
 

From a wealth management standpoint, while it may be advisable to consider some essential profit booking, it’s crucial to remember that most investments are made with a long-term horizon in mind. Therefore, adopting a staggered investment strategy is recommended at this juncture.

As regards valuations, a lot of heavy lifting was expected to come from earnings growth. Are markets worried that it may not come through amid challenging macros?

While valuations in certain pockets may seem stretched, when viewed from a top-down perspective, particularly in a largecap space, valuations do not appear to be stretched.

Over the past decade, the National Stock Exchange Nifty50 has maintained an average price-to-earnings (P/E) ratio of 24x for the trailing 12 months, while the current P/E stands at 22x. The Nifty Midcap 100 also has a P/E ratio of close to 23x, which aligns with long-term averages.

In contrast, smallcap valuations have experienced significant expansion, rising from 21x in June 2023 to 24.2x in September 2023. This expansion places smallcap valuations in a relatively expensive territory when examined through a historical lens.

Nonetheless, considering our fast-growing economy, corporate profitability is expected to mirror this growth in the years ahead.

Are there any pockets that appear overheated?

Some sectors, such as defence and capital goods, appear to have overheated in the short term. However, the robust long-term growth outlook indicates that any correction is likely to be temporary, with fresh buying expected to commence at lower levels.

Your corporate earnings growth estimates for 2023–24 (FY24)?

The strong first-quarter FY24 earnings are expected to normalise in the coming quarters, with a potential growth rate of 20–22 per cent.

The capital expenditure cycle, coupled with sustained strength in the banking sector and healthy consumer spending, is poised to support continued earnings growth.

Positive factors such as the anticipation of a soft landing in the US and a potential economic revival in China are expected to contribute to overall growth.

Businesses with an outward focus, such as the information technology sector, will likely perform well as the global economic outlook improves.

However, rising crude oil and commodity prices may hurt profit margins in the third quarter of FY24.

What has been your strategy at Emkay Global since the March lows?

Our strategy involves identifying high-growth themes and building a bottom-up-driven portfolio while being market capitalisation-agnostic.

It’s important to remember that during market downturns, small and midcap stocks tend to decline rapidly and can sometimes be challenging to liquidate. Therefore, caution is necessary during times of market exuberance. In the current cycle, we have maintained a bullish stance on the manufacturing theme.

How is the wealth management business shaping up?

The wealth management business is in a growth phase, presenting numerous opportunities. One striking feature is the migration of a considerable portion of the previous retail business into mutual funds, where systematic investment plans now reach approximately Rs 15,000 crore per month. This is where active wealth management plays a crucial role.

The demand for expert guidance and assistance in selecting suitable products for client portfolios is a key function that wealth management firms equipped with robust research and advisory capabilities can efficiently fulfil.

Regular portfolio evaluation and ongoing active portfolio management are essential prerequisites for achieving success in portfolio performance.

Within an active wealth management framework that prioritises meaningful asset building, the increase in the number of wealth managers and the associated compliance costs should be viewed as relatively inconsequential in the long run.

Are there any decisions you regret or are happy about as a fund or money manager, given recent market performance?

When the markets have been in our favour, and we’ve been exploring themes with secular implications, there’s been no reason for regret. We’re delighted to have introduced the manufacturing theme through our Emkay New Vitalised India Strategy Portfolio Management Service, and it has performed admirably in the past year, delivering one-year returns of 48 per cent.

We’ve also recommended sectors such as banking, financial services and insurance (BFSI), along with technology, to our clients. The BFSI theme has yielded positive results, and we anticipate that technology, which has underperformed recently, will begin to pay off for investors in the next one or two quarters.

As of August 30, 2023, the one-year return from better-performing banking funds has been in the range of 19-21 per cent, while technology funds have returned 18-19 per cent.