PSUs would likely outperform in the next 12 months: Manish Sonthalia

The small-cap universe has been in a profit booking mode over the past few sessions, with the BSE SmallCap index falling nearly 3 per cent in a week. Yet, MANISH SONTHALIA, chief investment officer at Emkay Investment Managers said in an emailed interview with Nikita Vashisht that India is likely to get Global Emerging Market (GEM) and India-dedicated flows as it is a favored investment destination globally. Edited excerpts:

Can a record rally in Japanese markets prove to be a significant threat to India in terms of foreign flows? What about China?

Despite the Japanese markets making a comeback to touch all-time highs, I don't think it will hamper India flows. India is likely to get Global Emerging Market (GEM) as well as India-dedicated flows as it is a favored investment destination globally.

Bulk of the flows would likely come post elections. I think global allocations could imply funds moving out of China and moving into India as growth rates out in India are likely to be superior.

What about flows from the domestic institutional investors (DIIs)?

Foreign institutional investors (FIIs) have been net sellers in January and February to the extent of Rs 22,000 crore. Domestic institutional investors (DIIs), on the other hand, have been buyers all along. This trend is likely to continue at least till elections are over. Valuations are pretty comfortable as far as large-caps are concerned. The only conundrum is that BFSI space is languishing when roughly 30 per cent of the total growth in the Nifty EPS in FY25 is likely to come from this segment. The consensus is assuming a 16-18 per cent Nifty EPS growth in FY25.

Is the selling in mid, small-caps behind us? Are there any sectors within this market segment where you find valuation comfort?

Mid-caps and small-caps are a very large universe and their performance can't be generalised. Not all small-caps or mid-caps are very expensive nor are all very cheap. There are pockets of expensiveness and pockets of reasonable valuations in both the spaces.

At the index level, the mid-and small-cap indices are trading at premium to large-caps, and this premium valuation will likely remain till retail flows continue to remain strong. I don't think this is going to correct in a hurry.

How do you think Q4FY24 will pan out for India Inc? Will the higher for longer narrative keep margins under check?

The December 2023 quarter (Q3FY24) saw muted topline growth, but margins expanded for India Inc. This trend will likely continue in Q4-FY24. Sectors exhibiting growth would be BFSI, Autos, Capital goods, Pharma, Oil & Gas, metals, and Cement. Consumer sector, however, continues to face headwinds.

 

Are PSU stocks, including public sector banks, becoming overheated?

There is still great value in PSU banks, defense, oil marketing companies, and select monopolistic PSUs in the mining and minerals space. PSUs, in general, would likely outperform in the next 12 months. That's not a contrarian call. It's already a well discovered sector call.

How do you assess Tata Motors' demerger? How should investors play it? Do you think this changes the dynamics of the auto sector and trigger more such moves by companies?                            

I don’t think there is any significant value unlocking post-demerger as there was no inbuilt holding company discount pre-demerger. The option, however, to invest in the commercial vehicle (CV) and/or the passenger car segment would be an added advantage.

The Internal Combustion Engine (ICE) segment is slowly and silently making a comeback in the markets. That's a space to watch out for. This was written off long back, but one should look at the earnings and the stock prices of individual companies.