FIIs may make a comeback this year, says investor Madhusudan Kela

Market veteran and founder of MK Ventures, Madhusudan Kela, tells Siddharth Zarabi, Editor of Business Today, that the capex theme was maintained in the Budget. For the long term, he advises investors to look at value and temper their expectations on returns, since the Bull run of the Indian markets has run into rough weather, thanks largely to developments abroad, especially the trade wars that US President Donald Trump has initiated. Kela believes in the strength of the rupee and says foreign investors, who have been “relentless” in selling Indian stocks, will return soon. Edited excerpts:

In the last few months, we have seen a pullout by foreign portfolio investors (FPIs) and consequent downtrend in the markets. But with the Budget, is it time for investors to resume their long-term investment?

We must understand the backdrop. From the lows that we hit in 2020; the equity markets have given extraordinary returns. You have had companies’ share prices go up 10, 20, 30 times, and many of these are small- and mid-cap companies. A lot of money has been made in the last four years. This correction is in that backdrop that if you continue to compound your money at 25, 30, 35%, then there is something wrong with the people who are establishing these businesses, which are struggling to make 18-20% returns on equities (RoE), but where investors can buy derivatives and compound at 30-35%. That is unreal, but it happens because the market is not always driven by fundamentals, it is driven by greed and fear. Obviously, a lot of greed crept into the market in the last 12 months, where everyone wanted to have a family office, AIFs and everyone wants to be part of the stock market.

At this point, it is important to understand that these returns are not replicable over the next three-four years.

Now, does equity remain a good asset class to play in, given the alternatives? If you are looking for asset allocation and given the long-term India story, which I am very convinced about, equity remains a very good asset class with moderate return expectation, right.

How do you play this? There are phases when you make a lot of money in the market doing nothing, and there are phases when you must work hard. We are getting into that second phase. The market will not make you money, but your individual stock picking and your bottom-up ideas will make money. We live in a very volatile world, and you must make volatility your friend. Do your homework. There is no rush and buy companies at any price. You must have faith that the markets are going to be volatile, and if you have done your homework, you get excellent entry opportunities. Bottom-up investing for this year with moderate return expectations is what I would vouch for.

And lastly, we have been part of the bull market. We must preserve whatever we made. If we have that mindset, we will be able to preserve what we made and add moderate returns over the next 12-24 months, and that will be a very good outcome over a five to six-year time frame.

How will the global context feed into our markets?

Global sentiment is what is influencing flows. FPIs have been relentless sellers in the market from October. They’ve sold close to Rs 2.5 lakh crore. That has nothing to do with their view on India, it has got to do with their view on emerging markets overall. They lost a lot of money in Russia and in China. And the money is going away from emerging markets because of the strengthening of the dollar. If you are a pension fund getting 5% on US fixed-income assets, and if you must meet obligations in US dollar terms, then you are likely to invest in the US. Today, the world is far too tilted in favour of US. That can’t last forever. Foreign investors should return to our markets sometime this year. And I expect that foreign selling will subside.

What is likely to happen in the context of trade wars across the world?

Trade wars are never good. But they are here. The main question is this: Is there any specific sector or company in India that can benefit out of it? And I would say there will certainly be companies that will be able to fill part of the gap that emanates from the disruption and benefit.

Which are the likely beneficiaries?

It looks like some chemicals, agrochemicals companies, which have a larger base worldwide could benefit. Some of these stocks have not done well in the last three, four years because the cycle was bad. But we are still putting our heads together. My larger point is that this volatility is here to stay. Relatively, India is at a sweet spot, and we could benefit out of this situation in the medium to long term.

Can it get worse from here and should investors be prepared for a short-term impact?

It is always possible. You know, foreign investors hold $900 billion in India, and they have sold $30 billion, which is just 3% of their overall holding. Can they sell another 3% if there is a real global turmoil in the world? It is entirely possible. I can only say that I will tighten my belt more, I will put in tremendous amount of work. The market will provide volatility, and it will provide us excellent entry points to own companies for a longer term.

The rupee breached 87 to the dollar. Has that scenario changed now?

Again, it will depend on how the dollar behaves. If the Dollar index continues to strengthen that will mean that the rupee will weaken. If we look at what has happened to the Chinese Yuan, then the Rupee is not doing that bad.

What is the likely impact of the tax stimulus in the Budget on consumption-related stocks?

It makes perfect sense to give Rs1 lakh crore to consumers. That was the class that was feeling the most hurt because of job losses and the impact of inflation. It has done well on capex as well, because if you include the grants to states, the overall capex growth is 15-16%. Both have been done while maintaining better fiscal discipline than what the market would have expected. The government has also addressed a lot of other issues, like the ease of doing business, decriminalisation of offenses, etc.

Looking at specific sectors, what they have done for the toys and laser industries, what they have done for extending credit to MSMEs, for the national manufacturing mission, to promote solar power is commendable.

What sectors are you looking at now?

We always avoid high valuations. We maintain that outlook. From the market’s perspective, the biggest pain point are the larger mid-cap companies. That is where there is maximum discomfort in terms of valuations. Because those are the centre of all small, mid, and large-cap funds. I would surely avoid anything that is very highly valued compared to the growth it offers. And I will tilt more towards buying value, which has not been in favour for the past three to four years. Value may be in large-cap companies, or in small- or mid-cap companies, but my tilt will be towards buying value. And it will be more bottom-up rather than backing any big theme at this point. Once again, I want to repeat that this market volatility gives you an excellent opportunity to enter these companies.

Do you think the capex and infrastructure themes will continue to have play?

They will continue to have some play, but the markets have become very nervous looking at the headline number, in terms of correction. But let’s not forget, a lot of these stocks have corrected 30–50% from their peak. At some point of time, they will offer risk-adjusted value. I would not write them off.

What is your outlook as far as earnings growth is concerned for the current financial year?

Earning growth rate should pick up in the second half of 2025-26, but earnings growth has been a challenge and that is being reflected in the market. If earnings were fine, I don’t think we would have had this kind of correction. But because in the first six months the capex was slow because of the General Elections and a general slowdown in the overall corporate sector, I expect that to pick up in the second half of 2025-26. And Nifty is trading roughly at 18 times, which is lower than the last 10-year weighted average of valuation. By no stretch of imagination are these frothy valuations.

How do you foresee FIIs flows?

I think they should come back. It’s been heavily tilted, and the US has now become 75% of the world market cap. At some point, maybe in this year, we will see FIIs coming back. But it’s very hard to comment whether it will happen in the next 30 days or 60 days. But I would be optimistic because you can’t ignore the long-term potential of India. Let’s see how the market behaves in the next 30-60 days. They are very critical, even from a global market perspective. I don’t expect them to come back immediately, but I am hopeful that at some point during the year FII’s will come back.