The cheaper valuations have encouraged a lot of companies to raise capital at lower valuations and going by recent trends, we believe that there will be appetite for companies that offer value to their investors.
By Urvashi Valecha
Even though markets have recovered smartly from the lows of March, the Nifty is still trading at a discount to its fair value, says G Pradeepkumar, chief executive officer, Union Asset Management Company. In an interview with Urvashi Valecha, he explains why the markets may not see a significant correction on account of Q1 results. Edited excerpts:
1. The broad perspective is that the markets are de-linked from the economy given the run up despite challenges arising from the pandemic. Your view.
Our view is very different on this. We don’t believe that the equity markets are de-linked from the economy. The reason is that when the Covid-19 pandemic broke out and the markets really tanked, they overreacted. The markets at that stage and bottom were probably at more than 25% discount to their fair value. In our analysis, compared to the fair values, the markets have gone through a steep discount, which, we think, was bound to be corrected. At that discount, the markets were screaming ‘buy’, which many smart investors realised. So, money started coming in, which is why the markets rallied. I think it was just bridging the gap between the fair value and the price. Some stocks have really run ahead of fundamentals probably. But, as a market if you look at it, in our view, the Nifty is still at a discount to its fair value. This is because the fair value of the market has not fallen by more than 10%. Nifty itself is at a more than 15% discount from its peak. We believe that there is still room for the markets to grow.
2. So far, systematic investment plan (SIP) inflows into the market have not been impacted even as the net inflows have declined. Will retail investors continue keeping faith in the SIPs?
From all the feedback we are getting through the numbers from retail investors, we are observing that their faith in SIPs is intact. The only individuals we found to pause or stop their SIPs are the ones who have an immediate cash flow problem. So, individuals like that may take a pause from their SIPs. An interesting insight I got while talking to many of the distributors is that during the lockdown, while some people have been hit very badly, for people whose income has not been affected very significantly, expenses have gone down during the lockdown and they have more support in cash. Such people are looking for avenues to invest and are willing to start SIPs. So, we have no doubt that SIPs will continue to be strong.
3. Do you see markets correct once again after Q1 numbers come out?
According to us, the markets and the informed investors have already built in the Q1 results. It is no rocket science to devise that Q1 results would be bad for most companies, so we are not expecting a big surprise. If at all there is a surprise, it will be a positive surprise, so we are not expecting any immediate correction on account of Q1 results, but there is a possibility that the markets may remain volatile over the next three months. There are a whole lot of global factors that can affect markets, and based on news flow the markets may remain volatile. But, we are not expecting a significant correction on account of Q1 results.
5. Marquee companies are hitting the secondary markets, do you see this trend sustainable? Is there an appetite for the IPOs, FPOs and Rights Issues in the market?
The cheaper valuations have encouraged a lot of companies to raise capital at lower valuations and going by recent trends, we believe that there will be appetite for companies that offer value to their investors. There will be money on the table for investors, and, as long as it is there, we believe that the fundraising will be well accepted by the market. It is also important to understand that many of these companies are actually building up a war chest. We would expect more issues because valuations are good, there will be more money for the investors and there is more liquidity in the system, and the companies have a real need to have liquidity in their balance sheet.
6. What is your view on the sectoral performance of financial stocks and how precarious is the situation?
We do expect the financials to remain the top sector in the near future. However, our thought is that stronger businesses may replace some of their existing constituents. That is possible, but the financial sector, as a whole, will remain dominant. While the individual companies will change, the financial sector in itself is well diversified, so there are companies with high touch-points and lower income slides that would face a lot more short-term disruption such as microfinance institutions. Whereas companies that offer home loan or car loan will be relatively less impacted. The number of people who are opting for moratorium is going down, which also is a positive sign. While there could be a rise in NPAs in the public sector, we don’t think that in the banking system there would be material impact.