Should you be greedy or fearful on Dalal Street now? Richa Agarwal of Equitymaster explains

The Indian equity market climbed over 1 per cent on Thursday’s morning trade after the US Fed announced a 75 basis point rate hike which was in line with the market expectations. The 30-share index BSE Sensex traded 733 points up at 56,550 at around 10.45 am (IST). Likewise, the 50-share NSE Nifty index was up 204 points at 16,845 at around the same time. So, does the market look attractive after over a 10 per cent fall since October last year? Or should you stay fearful on Dalal Street? In an interaction with Business Today, Richa Agarwal, senior research analyst, Equitymaster shares her views. Edited excerpts:

BT: How do you see the present valuations after the healthy correction? Is it time to turn greedy?

Richa Agarwal: The price-to-earnings (P/E) ratio for the benchmark index is 22 times, well above the median of 20 times. The smallcap-to-Sensex ratio is at 0.47 times, versus a long-term median of 0.43 times. So despite a correction, the valuation of benchmark indices is far from attractive. At the same time, there are individual stocks that have witnessed corrections in the range of 30 per cent to 50 per cent and are within the affordable zone after a long wait post-pandemic. We believe this is time to be neither fearful, nor greedy, but highly selective.

BT: As you said, it is time to stay highly selective. Which emerging themes do you think may give big gainers going ahead?

Richa Agarwal: The themes we are excited about include electric vehicles and semi-autonomous driving concept in cars, real estate revival, the upturn in capex cycle and digitalisation of the economy. We believe that the electrification and automation drive is still in the nascent phase and is likely to gain momentum. There are companies in the auto ancillary space that are empowering this revolution, and stand to gain from the premiumisation of products.

The real estate sector has shown signs of revival after a long lull. The sector is better regulated and has witnessed significant consolidation in favour of organised players. Companies with a healthy execution track record and strong balance sheets are likely to witness growth in our view.

A lot of stocks that benefit from capex activity, especially in the smallcap space are available below book value and are yet to price in the positives from increasing capex. Attractive valuations and upcoming growth potential in the business make this theme exciting.

Lastly, digitisation is a long-term structural trend. Given our demographics and lower penetration, we are quite positive about it.

But again, we are highly selective and have not taken our eyes off the fundamentals of the business and the entry levels in stocks that we believe will benefit from these themes.

BT: What is your advice to investors amid rising inflation, interest rates and volatile crude oil prices? How can they create a strong portfolio considering the present uncertainties?

Richa Agarwal: Investors have little control or prediction abilities with regards to macros such as oil prices, interest rates and inflation. I believe rather than obsessing over these factors which we cannot predict with 100 per cent success, one should focus on building a portfolio for the long term. Over the long term returns in stocks are more influenced by fundamentals, management quality and one’s entry levels.  So, I would recommend having a long-term investment horizon with a focus on good businesses with healthy management quality, a margin of safety in valuations and a prudent asset allocation.

BT: What is your take on rate-sensitive sectors considering rising interest rates going ahead?

Richa Agarwal: Auto, realty, consumer discretionary, consumer durables and banks are some sectors that are rate sensitive. I do not particularly avoid or take exposure to rate-sensitive sectors based on interest rate movements. Over a period of 3 to 5 years these effects average out. That said, I would be wary of companies with commoditised business, thin margins, where business is highly capital intensive and the ones with high debt on the balance sheet.

BT: Which factors will drive markets going ahead?

Richa Agarwal: Going forward, in the near term, markets are likely to be under the influence of corporate earnings, the frequency and quantum of interest rate hikes, FII activity and inflation.  

BT: Most of the stocks from the chemical space have delivered multibagger returns to investors in the past 5-10 years. How do you see the trend considering volatile commodity prices?

Richa Agarwal: The sector still stands to gain with global players looking to outsource beyond China. However, the industry is quite competitive with a high vulnerability of margins to raw material prices and supply chain linkages. It could be a mistake to extrapolate margins in the past for future projections. The competition too is likely to get stronger with more capacities coming up. We would again be highly selective with focus on companies with clear leadership in the niches they operate in, with high levels of backward integration and on companies where valuations do not look prohibitive.

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