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Which camp are you in – the cautious, happy camp which has made a lot of money last three-four years and now taking it easy or still on the ball, completely looking for good ideas and not very cautious on the market.
S Krishnakumar: I think I belong to the first camp and been cautious but invested, so we have been probably making good returns last three-four years. Of course, with all the news flow around us that we see, India is in a sweet spot in terms of foreign interest and also on domestic flows that are coming through.
India’s equity asset class is looking to really do well. Having said that, if you look at the valuations basically, we have started discounting FY26 and FY27, so that basically means that we are probably headed into a phase of time correction, consolidation, probably some amount of value correction that we should be prepared for.
So, incrementally, we will be quite watchful. There are a few triggers that could dispel some trouble for the markets. Of course, the earning season has kicked off and there is some amount of disappointment on the growth and profitability front in some sectors.
The budget is anticipated in the next week and of course, there are expectations of some relief in personal taxation but again there is also talk of increased capital gains tax, etc, possibly some noise on wealth tax which would be negative for the market, so that could be some triggers for a correction that could come post the budget.
And of course, the bigger event on the US front where the Republicans seem to be kind of pulling back up and there is a lot of noise from Donald Trump and what he wants to do which could create some amount of liquidity shift globally.
There is reason to be slightly cautious, but have you trimmed your position materially or are you fully invested, just shuffled a bit because, however, kind of valuations in certain pockets may have turned frothy but there are enough quality companies also where good earnings growth and good managements are doing a lot of stuff. So, are you looking at those companies or you are, to the degree of caution is so high that you have raised meaningful cash?
S Krishnakumar: See, I have been having some amount of cash of about say 20-25% waiting for some larger correction in the market. But of course, as you said rightly, there are opportunities and from a longer-term perspective we need to be invested in the market though being prepared for periods of correction, periods of time consolidation. So, definitely if you look at some sectors like the auto, auto ancillaries, look at pharmaceuticals for example, consumer durables which have been underperforming and coming back.
So, there are a lot of sectors where one could get surprised on the positive from earnings momentum and possibly that is where one should try and position oneself incrementally to go through the next six months and one year.
If you look at pharma, for example, it has been a big laggard for a long while but looking at the kind of return ratios and cash flows that these companies are generating, healthcare seems to be one good space where one should probably dial up more.
And also, some of the other sectors, smaller sectors like real estate, retail, fashion, cotton, textiles, etc, also can come back and we should probably look at them in a more meaningful manner to get some value in this market.
What exactly would you look for? Would you look for a Gokaldas Exports kind of companies which are mostly exporting or would you look at a fashion retailer domestically but that space has not been doing well last few quarters, what kind of textile play would you look at?
S Krishnakumar: Firstly, on the spinning side and the value chain on cotton, etc, there has been definitely a fair amount of de-stocking that has happened. Demand has picked up and on a global basis textile demand is improving and hence the cotton spreads, the spinning spreads are getting better.
A lot of companies there have also invested capacities and are sitting on capacity to ramp up and so we have a benefit of demand growth and also margin expansion on the spinning side.
The other part is the domestic retail play where again with the weak consumption patterns for the last couple of years, the companies have been under pressure.
Right now, the expectation is that with the kind of improvement in the income levels and better proposals in the budget that will also come through, we do see that the retail space would be a beneficiary as domestic consumption picks up.
You are already seeing it in terms of consumer durable appliances, etc, in the first quarter and the fourth quarter, signs are there, so I think apparel demand, fashion is again just probably a quarter away. So, there should be a good space to position oneself basically.
Go back on that point of correction post-budget could be triggered from overseas, what could be the extent of correction? Do you think valuations are in bubble zone or 10-20% or more kind of correction we are susceptible to or you think a shallow correction because liquidity remains strong, but nevertheless, it may actually come about?
S Krishnakumar: Headline index correction of between 5% and 10% is what one can probably look at at this point in time given the kind of interest in India from overseas and also domestic flows that are coming through.
Any significant changes on the domestic taxation on the equity markets, be it mutual funds or otherwise could possibly reset the market if there is any big change that comes through on the capital gains structure, etc, or something on the dividend side, etc. So, these are shifts that could happen instantly on the tax proposals as they come through, so that is something that we should be watching.
And when the headline index corrects by 5-7%, the small and midcaps could correct as much as 20% so that is the kind of band that we can be expecting in addition to some of the global news flows that can come through in terms of the US dollar positions, etc, the monetary policy there and what Trump wants to do when he comes into power.
At the same time, if indeed a rate cut in September, some are saying earlier July as well, and Trump coming back coincide, could this lead to some further softening in the dollar as well as the bond yields triggering emerging market inflows and we may also be a beneficiary, is that a hypothesis also possible?
S Krishnakumar: Yes, definitely, from a broader sense liquidity and the rates coming down will help. At the same time, discussions with investors overseas, etc, and on various roadshows done by many Indian strategists point to a fact where people are very bullish on India but again from a timing perspective people do want to wait and buy at the right valuation.
So, this trade-off is what is keeping the markets within a range bond phase where there is a correction of 3% to 5% and then you pull back again so that is the kind of positioning that is happening now, whereas large flows of money would come on higher corrections into Indian markets.
For the next six months, the areas to watch out for would be textile and what else, one or two other areas?
S Krishnakumar: The investment cycle is doing pretty well, so I would be very-very positive on the industrial side, provided there is a good correction that comes in because the order books have been swelling and the valuations have gone up tremendously, so you get some big correction there, I think that is a big space that you would like to be into. Again, the retail consumer durable space is something that would be very interesting. Durables and consumption on premium side is something that we should watch out for from a good delta growth perspective.
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