Most FPIs waiting for a correction on Dalal Street to buy more: Pratik Gupta

Foreign portfolio investors still like India’s long-term outlook but they are concerned that at current valuations, the market is already pricing in a lot of the near-term upside, said Pratik Gupta, CEO and Co-Head, Kotak Institutional Equities. In an interview to ET, Gupta said most FPIs are waiting for a correction to buy more but staying invested with a modest overweight position on India. Edited excerpts:

US bond yields have come off lately contrary to earlier expectations, despite the US Fed minutes showing that tapering is being considered. Will emerging markets see a sell-off similar to the taper tantrum of 2013?
The Fed’s policy shift last month had indicated that the ultra-loose monetary environment won’t last forever and it implied that we would see a tighter global liquidity environment and higher bond yields going forward. However, Powell’s speech recently reiterated a dovish message for now – so we are in a transition period and it may be a few months before any meaningful change occurs; so the US dollar should remain range-bound and emerging market equities could continue to rally in the short term. In any case, India may not be as badly impacted from any Fed taper as in 2013 given a much lower current account deficit, bigger foreign exchange reserves and a stronger growth outlook.

How are foreign investors viewing India as an investment destination?
Foreign portfolio investors still like India’s long-term outlook, but they are concerned that at current valuations, the market is already pricing in a lot of the near-term upside. Most FPIs are waiting for a correction to buy more, but for now, they are staying invested with most maintaining a modest overweight position on India – as it is one of the few large, liquid emerging markets which offers strong long-term growth. The Chinese economy is slowing down and other EMs like Brazil or Indonesia are too dependent on commodity prices and hence are seen as relatively more risky. We’re also seeing strong interest from FPIs in ongoing IPOs from India, especially in technology-based companies – these can attract new pools of global capital. Most are also closely tracking India’s privatization efforts, and possible inclusion of India in global bond indices. The Indian rupee is seen as relatively stable, so that also helps.

Has the rally from March lows last year run its course? Is it a good time to take money off the table?
The Nifty is now at about 23 times FY22 price to earnings and 20 times FY23 price to earnings. Even if we optimistically assume some earnings upgrades, the risk-reward is no longer as attractive considering a likely increase in global and local interest rates over the next 12 months. We believe it makes sense to book some profits in small-and-midcaps in particular where valuations are even more stretched. The BSE MidCap index is now trading about 26% above its 2017-end peak, and many midcaps are now trading above their largecap peers’ valuations.

What are your most preferred sectors and which sectors would you advise investors to avoid?
In general, we now prefer largecaps to small-and-midcaps, given relatively better valuations. We like banks due to improving asset quality, capital goods due to early signs of private capex upcycle, and cement as a play on infrastructure and real estate pickup. We also like the steel sector which should benefit from sharp deleveraging and earnings upgrades as demand continues to outpace supply growth. We suggest avoiding upstream oil companies where cost structures remain high and production growth remains weak. Midcaps in IT services and chemicals also appear quite expensive now.

Unlock trade has been a big theme of late with investors betting on sectors such as aviation, transport, multiplexes etc. Is it a good time to buy these stocks?
Yes, but only with a long term or one year plus view given the risk of yet another Covid wave. Stick to segment leaders in airlines, multiplexes, retail malls and hotels that have strong balance sheets to survive another Covid wave and that will benefit from likely industry consolidation. Many of them have cut fixed costs aggressively and should see a sharp recovery in operating profits when revenues normalize, probably in FY23.

What is your prognosis of corporate earnings growth in FY22? Which sectors are likely to lead the recovery?
We expect Nifty earnings to increase by 31% in FY22 and by 14% in FY23. The growth will be quite broad-based, but the big increase will come from metals, financials and IT services. There may be further upside to earnings for steel and aluminium companies, and the capital goods sector – but there’s downside risk to estimates for auto and consumer sectors where demand may take longer to recover after the pent-up buying post-2nd wave is exhausted.