 "Vishal Kapoor, CEO, IDFC AMC")
The Indian economy is in a sweet spot as several indicators point to a relatively strong gross domestic product (GDP) and earnings growth outlook over the next three to five years, says VISHAL KAPOOR, chief executive officer of IDFC Asset Management Company. In conversation with Abhishek Kumar, Kapoor also shares why the asset manager is bullish on financial, automotive (auto), and consumer discretionary sectors. Edited excerpts:
The equity market is going through a lean patch for over a year. Do you think time correction is getting over and investors should raise their bets on equity funds?
At its last peak in October 2021 at levels of around 18,250, the Nifty was trading at a 12-month forward price-to-earnings (P/E) multiple of 23x, significantly higher than its last 10-year average of 17x.
Given the time correction over the past 12 months, a large part of the excesses seems to have been taken out.
Valuations have moderated but continue to be on the higher end, with the Nifty 12-month forward P/E now at 19.5x.
What is your expectation from the equity market in the next one year? What are the factors that will decide the market’s course?
While most countries are facing rising recession fears, India is in a sweet spot. Several indicators point to a relatively strong GDP and earnings growth outlook over the next three to five years.
Urban consumption has been robust, with extremely strong discretionary demand. Housing demand is picking up after a decade of downer.
The industry data is positive, corporate and bank balance sheets are pristine, and capacity utilisation has crossed 75 per cent, according to the Reserve Bank of India data.
Conditions are ripe for a private capital expenditure cycle over the next few years.
Production-linked incentive schemes, China Plus One, and now Europe Plus One should boost exports and increase India’s share in global exports.
Tax collections and government finances are in decent shape.
Corporate profits are at 4 per cent of GDP and have the scope to expand further, given the previous peak of over 7 per cent in 2007-08.
Rural demand should pick up in due course with the opening up of the economy and a good monsoon.
All these factors bode well for the equity market.
Which sectors are you bullish on?
Financial metrics have improved for banks. Loan growth is reviving, provision coverage at over 70 per cent and fresh provisioning are near all-time lows.
Given the cyclicality of this business, we expect banks to start providing for countercyclical provisioning, which will smoothen profit growth for the next few quarters.
The auto sector is also likely to do well, given the rising semiconductor availability and strong demand in the mid-to-upper price band.
On the margin front, the cooling-off of steel and aluminum prices should boost gross margins in the second half of 2022-23.
Additionally, the unlocking of the economy, return to office, and increased luxury travel demand are benefiting the consumer discretionary sector.
What type of equity funds would you recommend in the present market scenario?
Relatively new or conservative equity investors could look at lower volatility strategies through balanced advantage funds or diversified schemes like flexi-cap, multi-cap or equity-linked savings scheme for core allocation.
Seasoned equity investors could take advantage of the opportunity in value funds, large- and mid-caps, as well as thematic and sector funds.
Since most of the rate hike is already done, do you think this is the right time for investors to take exposure to longer-duration debt funds?
We currently prefer the three- to five-year government bond segment since it offers an attractive risk/return trade-off. Portfolio allocation decisions should be based on individual risk appetite and time horizon.
IDFC Mutual Fund has fewer passive and thematic funds, compared to most other major fund houses. Given the rising popularity of these funds, do you plan to increase offerings in these spaces?
We were early adopters of passive debt funds, and already have three target maturity funds as part of our offering. We plan to launch more such schemes in the near term.
On the equity front, we have had a presence in the broad-based passive category like the Nifty50, Nifty 100, and the Sensex for some time now.
We recently added factor-based index funds with momentum and low-volatility strategies to our bouquet. We intend to continue building on the passive space with offerings that can add value.
