The start of the rate cut cycle in the US bodes well for Indian stock markets. On September 19, the benchmark indices, BSE Sensex and NSE Nifty, reached new record highs of 83,773.61 and 25,611.95, respectively, following the US Federal Reserve’s decision to lower interest rates by 50 basis points (bps). But what does this rate cut mean for India’s equity markets? Which sectors should investors focus on to benefit from future opportunities? In a conversation with Business Today, Pawan Bharaddia, Co-founder of Equitree Capital, shared his views. Edited excerpts:
Q: How will the US Fed’s rate cut support Indian equity markets?
Bharaddia: FIIs have been continuous sellers in the Indian markets during the last three years and now with interest rate cuts beginning, we should see capital being reallocated from bonds to equities. Given its structural growth story, India is shining like an oasis and has been climbing up in most global indices. This should attract FII investments to come back to India and keep markets buoyant.
Q: With equity markets reaching record highs, what is your outlook for the market moving forward?
Bharaddia: Indian markets are at record highs primarily on the back of earnings growth and the newfound liquidity from domestic markets. We believe that both of these are likely to continue in the near future as well. Given that, at this point in time we don’t foresee any reason for a deep panic sell-off. There indeed is froth in some segments of the market and that is getting corrected automatically. For instance, if one looks at the defence or PSU segment, stocks have corrected well around 20-40% from their 52-week highs.
In the short run, we may see some corrections depending on how the interest rate cycle and other geopolitical issues play out, and it may not be out of context to see the broad-based markets down by 15-20%. However, from the long-term perspective, we seem to be in a structural bull environment so long as the earnings growth trajectory remains strong and visible. Needless to say, investors would need to follow a bottom-up approach to identify businesses with bright prospects trading at reasonable valuations to ensure long-term wealth creation.
Q: Which sectors do you believe will offer strong returns in the near future, and why?
Bharaddia: Our focus has been on manufacturing, engineering, infra-ancillaries, and select consumer plays. Indian manufacturing has been cashing in on the Europe+1 and China+1 theme and we believe this is a decadal opportunity for the Indian manufacturing or engineering sector. Likewise, the government’s continued focus on infra spend and changing demographics is presenting opportunities in the infra-ancillary and consumption space.
Q: Coming to your PMS strategy, how has Equitree Capital Advisors’ Emerging Opportunities delivered over 70% return to investors in the past year? Could you provide insights into the investment approach?
Bharaddia: The return for the past year has been an endorsement of our investment strategy where we look to invest in high-quality businesses at a reasonable valuation. We are focussed on buying businesses that are at an inflection point for high growth – generally over 25% CAGR during our investment holding period. Being early investors in these companies enables us to buy these businesses much below their intrinsic value leaving enough room for re-rating as the broader markets take note of these high growth companies.
During the last financial year, our portfolio saw around 30% increase in profit on a year-on-year (YoY) basis and as these companies got noticed in the markets, we have seen some re-rating as well culminating in the high return that you are talking about.
Despite some re-rating that we have experienced, our portfolio continues to trade at 18.5x FY25 PAT which is closer to its 10-year average and is poised for 30% growth for FY25 as well. In fact, during Q1 as well, the portfolio delivered about 39% growth in PAT on a YoY basis.
Q: How frequently do you rebalance this portfolio?
Bharaddia: We are long-term investors and generally don’t look at rebalancing the portfolio just because of stock price movements. We look to sell only in case if a business is not performing for unsystematic issues and/or the valuation moves beyond our comfort zone.
As long as the business continues to deliver our target growth and valuation is within our comfort zone, we would rather allow our winners to run as far as they can.
Q: With many money managers holding cash due to high market valuations, are you maintaining any cash reserves?
Bharaddia: We are not compulsive investors and do take cash calls at times. Given the genre in which we invest, we follow a staggered approach which necessitates holding cash at times. Despite the attractive valuation and growth visibility of our portfolio, we are not over-exuberant in building up the portfolio and are rather taking a cautious deployment approach. In line with this, we are currently sitting at around 14% cash on the overall level.
Q: How have the assets under management (AUM) in the PMS industry evolved over the past five years? Considering the increase in high-net-worth individuals (HNWIs) in India, what is your projection for the PMS industry’s size by 2030?
Bharaddia: There has been an increased acceptance of the need for having a professional fund manager who can customise a portfolio depending on the investors risk profile and return expectations. On that count, AUM in the PMS industry has seen healthy growth in the last 5 years. We believe that professional fund management as an industry is itself at an infection point as financial assets find more acceptance amongst investors and allocations to equity as an asset class increase. We strongly believe that this would continue to do well.