What do you make of the recent fall and volatility in Indian equities
The recent fall is to do with multiple factors like the macro concerns on India, rupee depreciation, FII selling and the NSEL settlement issues. Rupee depreciation due to persistently high inflation rate leading to tightening of interest rates and lack of any meaningful action by the government are the key factors attributable to the recent fall. However, if you look at the indices then we are now trading at lower band of valuations, and hence I do not see any significant downsides from current levels.
But several foreign brokerages downgraded Indian equities
Currently the sentiment is extremely bearish and some of these FIIs behave in a particular fashion, hence on the way down they all seem to think we are going to head lower and vice versa. With the bearishness prevailing across, it gives me the confidence that Indian equities are very close to the bottom. We currently are not changing our long term view on Indian markets where we think Indian markets could make new highs in the next 12 months.
Since you cater to institutional clients, what feedback are you getting from them Are FIIs aggressively selling or planning to exit the market
The recent outflows were more by hedge funds and they are known to create panic in the market. However, it would be wrong to say FIIs are aggressively selling in the markets as they understand that there is not too much depth in the Indian markets, hence they might not get exit even if they wish to. Most FIIs were not positioned for such a sharp fall in currency and rise in interest rates and thus it is leading to sector rotation. FIIs are doing sector rotation and are shifting more to defensives like IT, pharma and FMCG. On the domestic front, insurance companies, particularly LIC, have been aggressive buyers in the market.
In the midst of all this, where do retail investors feature
Retail investors are completely out of the market at this point of time. The HNI participation is at an all-time low.
How do you see the rupee trading
On the currency side, a lot of analysts have been talking about 70-71 levels, which could be the fair value based on REER model but such levels could overshoot depending on liquidity issues. However, domestic factors like government measures and cool off in oil prices could lead to rupee appreciating and settling at more respectable levels of 61-62 over the next few months.
So how do you devise your market strategy
We do not see much downside in equities from current levels. I admit, we have also downgraded our estimates significantly, but I feel the valuations are very compelling and the actual free-cash-flow yield to the enterprise value of Sensex comes close to around 8.5 to 9.0%, which is closer to the 10-year yield.
Some of the companies, who have the potential to generate huge free cash flow, are trading at a steep discount. Companies like ACC, Bharti Airtel, ICICI Bank, Idea, Maruti Suzuki, ONGC, Reliance offer huge value to the investors from a long-term perspective. Most of these stocks are trading at multi-year low valuations.