By Vivek Kumar M
While the stock market quickly recovered from the June 4 fall of 6%, DSP Mutual Fund’s managing director and CEO Kalpen Parekh believes that the market has now priced in most of the good news, and even a small negative news could trigger a kneejerk reaction. He tells Vivek Kumar M that valuations currently are running ahead of the profit growth.
The market has very quickly recovered from the June 4 collapse. How do you see things going forward?
I think more or less things have returned to normalcy. Markets will now focus on the Budget and there will be some anxiety around it, as people will want to see what the new government does. Personally, I feel prices are running ahead of the profit growth.
Over the last five-six years, every correction was bought into and markets again rose back sharply. Maybe investors in this decade feel that all corrections are worth buying into. Earlier, it was the other way around. Markets would not durably stay high.
The only concern one should have now is that most of the good news is in the price. So, any small negative news may create sharp corrections. But because flows are constantly chasing stocks, these corrections are shallow.
Do you believe current valuations justify the growth in earnings?
For the last couple of quarters, we have seen 15-20% earnings growth. That has largely come from margin expansion as the revenue growth has been in single digit. At some point of time, the profit growth can moderate. For this kind of past growth and future moderation in profit growth, 23x is expensive.
How should investors position themselves in Budget-related stocks?
If the Budget is fiscally disciplined and the focus on capex continues, markets should be happy. One of the reasons for the Indian markets to be where they are today is the stable macro, whether you talk about currency or fiscal deficit.
On the capex stocks, while a lot of growth is coming there, valuations are expensive. We will be cautious in this space when it comes to adding incremental positions at this level.
The markets have been steadily rising for the past four years. Going forward, do you see the same trend continuing?
If you look at the past 30 years, the median return has been between 12% and 14%. It more or less co-relates with the growth in profits and RoE of top 200 companies. However, in the four years after Covid, returns have been high because we got attractive prices in Covid correction. So, the return expectations should be moderated. At the same time, if investors earn more than inflation in the next 5–10 years, it would be a good outcome.
With the coalition government coming to power, there could a renewed interest in consumption. Do you see related sectors benefiting from this?
The consumption basket is seeing disruptions. New patterns are emerging. So, one has to be selective. It is important to identify companies which are ready for disruption or reacting to disruption.
This segment was the darling of the market between 2013 and 2021. After that, they became very expensive. The profit growth has been 10-12%, but valuations have been in excess of 40-50x PE. The bigger worry for the consumption basket is rich valuations rather than how consumers behave right now. We are relatively underweight on the sector. We find better risk-reward play in the BFSI space, especially private banks.