India continues to be a buy-on-dip market: Jyotivardhan Jaipuria

Jaipuria, founder and MD of Veda Investment Managers, sees growth coming back to India and the world

The markets are likely to give a thumbs-up to the outcome of the recent Assembly elections, Jyotivardhan Jaipuria, founder and managing director, Veda Investment Managers, tells Puneet Wadhwa in an interview. He says the Bharatiya Janata Party’s strong showing in the elections, especially in Uttar Pradesh, is a positive from a long-term perspective.
 
What are the implications of the Assembly elections outcome for the markets and the government’s reform agenda?
 
Our view is that Assembly polls generally do not significantly impact stock markets or policies — after the loss in the Bihar elections, the Modi government continued to push reforms. Overall, the strong showing in the elections, especially in Uttar Pradesh, has two implications that are positive. First, while two years is a long time, it positions the BJP as the clear favourite to bag a second term in the 2019 general elections. Second, with the win in Uttar Pradesh, the BJP is likely to become the largest party in the Rajya Sabha and could be close to a Rajya Sabha majority in four-five years.
 
How do you see the markets playing out over the next 6-12 months, given the domestic and global cues?
 
After the sharp rally over the past 10 weeks, we will see a phase of consolidation over the next few months, both globally as well as in India. The near-term risks to the market are more global. If a rising US interest rate leads to a further dollar rally, we could see pressure on emerging markets. Political risks in Europe can grab attention in the next few months as well.
 
The markets will be hoping against the rise of anti-EU (European Union) parties in elections in France, Germany and the Netherlands. In the US, President Trump has so far had the markets rallying in support of his policies. But over the next few months, the market will be looking for signs that he will walk the talk.
 
Over a 12-month horizon, I see the markets heading higher. Growth, which was a missing element since 2008, is likely to come back globally and in India. Growth visibility may be seen only back-ended in 2017-18, but will be a powerful trigger for the markets.
 
Which sectors and stocks do you see taking the lead if the markets were to move higher from here?
 
Over a 12-month period, we are bullish on Indian companies that can see huge operating leverage play out. Select infrastructure and capital goods companies, rural plays and gainers from a structural shift from the unorganised to the organised sector will perform strongly.
 
Do you think we are in a sell-on-a-rise market rather than buy-on-dips?
 
While the near-term valuations are expensive, over a 12-month and longer horizon we think India continues to be a buy-on-dips market. Earnings are at a low point of the cycle and a change in the earnings trajectory is going to drive markets over the next few years. We are also at a structural change in the savings profile of the Indian individual. We think equity will incrementally be a larger part of the savings basket at the expense of real estate and gold. This will make our markets less vulnerable to global events and consequent foreign portfolio investor flows.
 
How are global investors seeing India as an investment destination?
 
India continues to be treated as a safe haven within emerging markets. The macroeconomics in India is now stacking up well with both the fiscal deficit and the current account deficit under control. The likely advent of the goods and services tax later this year will signal that reforms are moving ahead. The structural growth story for India remains unaltered with demographics in our favour and an under-built infrastructure providing growth drivers for the next decade and beyond. There is a general consensus that India is likely to be the fastest growing large economy over the next 10 years.
 
Have markets run ahead of fundamentals, given the recent liquidity-driven rally?
 
Near-term valuations are not cheap, both in a relative and historical context. India is trading at a 17.5x one-year forward PE (price-to-earnings) multiple, a 15 per cent premium to historic averages. Within emerging markets, India trades at a near 40 per cent premium, though this is nearly in line with historic averages.
 
We think the demanding valuations will result in a near-term consolidation of the market. However, valuations will trade at a slight premium to historic averages as we are close to a bottom on the earnings growth front.

Are the markets fully factoring in the GST impact and the delay in pick up in corporate earnings due to demonetisation? 

The implementation of GST is a long term structural positive but will hurt earnings over next few months. There will be a dislocation due to switch to a new system and the teething troubles in its implementation. We think there will be de-stocking in the entire trade channel ahead of GST implementation. However, as we saw the demonetisation phase, the economy tends to recover over three – four months. We will see the same play out in the GST phase. Our view remains that while the first half of FY18 will see pressure on earnings, we will see a gradual recovery in the second half. Given the sharp rally in markets this calendar year, we think the markets are going to consolidate over next few months as the GST implementation plays out.

How convincing are the recent GDP (gross domestic product) numbers?

While the GDP numbers were a surprise for the markets, there are 3 points to remember. Firstly, there was a revision of the base which has helped a higher GDP growth (due to lowering of last year's GDP). Secondly, in December we saw manufacturers sell to distributors but retail sale was lower. This is reflected in the better than expected corporate earnings as well as lower GVA vs GDP. Lastly, the GDP estimates may undergo revision as more data on the medium and small enterprises where the stress was the highest is available and incorporated in the numbers.

What is your advice regarding the mid-and small—caps? What are your sector and stock preferences? 

Mid-caps and small caps are trading at a valuation premium to the large caps and are more vulnerable to a correction in the near term. However, over a two – three year view, I would be bullish on the mid-caps since they are more leveraged to the economic cycle in India. An improvement in the economic cycle in India leads to a much sharper earnings improvement for the mid-caps.

Our structural theme remains a turn in the domestic economy and we like sectors like banks, rural plays and select infra and capital good names. We play stocks with high operating leverage. The other theme we like is the structural shift from the unorganized to the organized sector though we make get a better opportunity to buy some of these stocks in the weaker results around the GST implementation phase.

Telecom sector has been buzzing with developments since the past few weeks. What is the road ahead for this sector, and your advice to someone who wants to make a fresh investment?

We have been negative the telecom sector though there is some positive news now that will help the sector. Firstly, the free scheme of Reliance Jio is behind us. Secondly, the industry is consolidating and that will help improve longer term profitability of the sector. We, however, still remain cautious and think we will get a better chance to buy stocks over the next year, as the war to gain market share continues.