FIIs won't let market rise and DIIs won't let it fall but retail investor real hero: Sunil Subramaniam

Economic Times

2 days ago

Sunil Subramaniam, Market Expert, talks about India's market resilience, the role of retail investors, the impact of US tariffs as well as expectations for the festive season. He also analyzed valuations across market caps. The market looks not just at the PE ratio which is one year forward PE, but also at PEG ratio, where you divide the PE by the growth rates. Mid and small-cap stocks currently trade at higher PEs, demanding superior growth to justify valuations compared to largecaps. While seemingly overvalued based on current forward PEs, strong growth expectations, particularly in auto and consumer durables during the festive season, could validate these valuations. Fund manager allocation towards mid and small-caps suggests continued buying support despite valuation concerns.
ADVERTISEMENT Global headlines continue to rattle the sentiments, but the markets remain resilient. Despite the tariff uncertainties, we see the DIIs constantly supporting the market and we see great conviction from the market participants. The latest AMFI data explains SIP flows increased to all-time high of Rs 28,464 crore. How are you reading all of these?
Sunil Subramaniam: You mentioned the strong support of DIIs, but I would say it is the strong support of retail investors in India. The DIIs have no choice in the matter because mutual fund investors are filling their coffers with money. Despite all the tensions of the last few weeks and the months, retail investors are constantly reposing their faith in mutual funds and with mutual fund managers there is a limit to how much cash they can keep.
So, the point is that it is actually the faith of the common man in the Indian future of the economy, of the markets, of everything that is driving this and DIIs are only pass-through vehicles. They may choose which sectors to put in, which cap curve to put in, even that is limited because about 40% of the total flows that come to the mutual fund industry are in the mid and smallcap broader market. So, ultimately we have to give credit to the aam janta or aam aadmi (common man). They are increasingly reposing their faith in the economy in the current leadership of the country and in fact Mr Trump's 50% tariff is probably acting as a rallying point for the country to take a very strong stance.
Let's give a hand to the Indian public that they are standing firm in the face of FII selling. So, that will continue and you will see that the domestic data are coming through very strongly. You saw the cut in the inflation to eight-year low and naturally that strengthens the case for an RBI rate cut in the next policy and the US Fed also now most likely to do a rate cut in September is what the data are showing, which means RBI's hand will be strengthened even more for a rate cut because then the differential interest rates between India and US will widen and cause pressure on the rupee. So, all in all, even a 50% tariff, probably 0.5% to 0.8%, is the worst case scenario impacting our GDP. So, we will still be at 6% plus. So, there is good news on the domestic front. Mr Trump and the international scenario is not very comforting, so FIIs are still selling more but the markets will then move.
If you don't mind a Hindi Bollywood correlation here to the markets, so there used to be this villain called Ajit, very famous for his one liners. So there is this famous one liner of his which applies to the market at this point. It is: I sko liquid oxygen mein duba do, liquid jeene nahi dega aur oxygen isse murne nahi dega , (drown him in liquid oxygen. Liquid won't let him live and oxygen won't let him die). Applied to the market situation, it is, FIIs isse badne nahi de rahe hai aur DIIs isse girne nahi de rahe hai (FIIs are not allowing the market to rise and the DIIs are not allowing it to fall). .So, the market is in a liquid oxygen state.
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In this entire story I like that the hero is the common man with heroic performance. We would like to sum it up that way. But having said that, markets really dislike uncertainty and I want you to elaborate and focus more on the timing of this uncertainty. The festive season has almost started now. It is very important for sectors and companies to make as much as they can from the festive season and the hopes are really high. Do you think the international triggers or headwinds or the tariff overhang would take a backseat because of the festive season? How much are you counting on this festive season for India being strong on the domestic front right now?
Sunil Subramaniam: The early arrival of the festival season is very important. This time, Diwali is coming by 23rd October. That is very crucial and everybody is geared to make this a super success because RBI has supported through rate cuts and there is a CRR cut coming into play very shortly. The dates are getting closer – September 5th. So enough liquidity, rate cuts; already 77 basis points has been passed on. I expect the balance 23 odd basis points to be passed on and there are chances of a fresh RBI rate cut supported by a Fed rate cut and the low inflation increases.
Unlock 500+ Stock Recos on App Second is fiscal policy. Of the Rs 1 lakh crore, so far, the customers seem to have preferred to save rather than spend and that is the data showing. But maybe they are all waiting for the festive season because that is when discounts come from various competing manufacturers and NBFCs and banks reduce the EMIs to make it a very good package for people to go and upgrade their cars, their house, or buy that consumer durable they have been waiting for.
ADVERTISEMENT So, this time things are building up for the festive season to be a real dhamaka season. Remember one thing, the festive season promises good topline sales. But how companies adjust their margins, we will get to know only when the results come out January 10th onwards for the festive season. But that being said, sales will lead to a private capex pickup because capacity utilisation will go up in the country. So, I think that the market is ready to ignore the international tensions at this point.Also, everybody talks about 50% tariff, but it is actually two 25%s. The first 25% is economy related to the fact that we have not been able to come to terms on a trade agreement. We have a hard line on agriculture and dairy, they have a hard line on opening up our market. But the second 25% is political. It is not related to India at all. It is to do with Russia. India was collateral damage. We are just a soft target being used by the US to put pressure on Russia and they are not able to do the same with China because China is too important to the US. The trade deficit with China is $350-400 billion against India with only $50 billion.
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So, Trump is saying India ki, isko thappad maro, Russia pe jake result dikhega. Toh this 15th August ka jo bhi talk hote hai na , (If you slap India, it will have an impact on Russia. Lets see what happens in the August 15 talks). If there is a positive signal, then yeh 25% hat jaiyega (then this 25% will be gone). If that really happens, then the market will be relieved that instead of fighting a very uneven battle at 50%, at 25% we are more or less level playing field with the other competing countries. So, we wait for 15th August to give us that boost, that hopefully those talks should go well for our sake.
While you say festive dhamake is on the cards, let us hope and believe in the same. What are those pockets and sectors one should eye from here to December? Will consumption, travel and tourism, auto players, leisure will be in focus when we talk about the festival consumption demand?
Sunil Subramaniam: Yes, absolutely. Right now, we are heading for a long weekend with Krishna Jayanti and Independence Day. That is a four-day weekend when domestic tours and travels will take off and then there is Ganesh Chaturthi around that. Bombay shuts down for a week and you have again a long vacation and then you have the Diwali weekend. So, yes, festive travel and tour and hotel rates are already showing that. They have all doubled or something over the last year or so. The rates are very exorbitant. So, to that extent, it is good for the hotel and the airline industry.
ADVERTISEMENT Second, I expect a boost in auto which is a key element. That is where the EMI impact comes in a big way and people build up to buying that next car and you see a lot of new launches and a lot of competition in the auto sector means that you are going to see really a set of very good purchasing options. A combination of lower EMI and manufacturing discounts around Diwali and Dhanteras is a good time to buy new things. I expect the auto sector to show up and a good monsoon should play out in terms of rural demand with entry- level cars and two-wheelers. Finally, from a market perspective, in this quarter whatever numbers happen, when you go to the next quarter, FIIs and DIIs both look to FY27 earnings to discount it. So, automatically you get the price correction of another 10% growth in the nominal GDP for next year coming through into the valuations. In that sense from a crossover perspective, we are in a sweet spot now where we will build up to a more reasonable valuation probably starting October onwards for the Indian markets. This is not just about the economy and growth, but the markets also should see a big change in their outlook starting October according to me.
I really want to understand the gap between valuations and earnings growth. How are we placed across market caps?
Sunil Subramaniam: We are reasonably placed in the largecap space. If I look at the recent earnings top line is in the high single digit but bottom line growth is about 10% which is in line with the nominal GDP and the valuations though they were 21x, and still factoring that growth over the next two years. Largecaps are reasonably close to that territory. In mid and smallcaps, we are dealing at about 31-32 PE. So, what the market is saying is that though smallcaps and midcaps especially are probably growing much faster than largecaps, that still is not good enough. We need a much higher growth rate from the midcaps. So, the market looks not just at the PE ratio which is one year forward PE, but also at something called the PE growth, the PEG ratio, where you divide the PE by the growth rates. So, the higher midcap and smallcap valuations have to be justified by superior growth compared to largecap, that is the expectation. If mid and smallcaps are going to deliver the same kind of growth as largecaps, they are clearly overvalued. But my confidence is that in auto and consumer durables, all are largely midcap and smallcap players., I believe that those earnings will get justified come the next quarter. But right now, if you look at purely the current forward PEs, midcaps and smallcaps are definitely valued much more expensive than largecaps and much more expensive than their historical averages. So, purely from a number perspective, they seem to be overvalued. But if you believe that the growth story will come into play in the festive season and therefore the valuations also factor in for one more year, I would say that mid and smallcaps do not look as overvalued as they look from a data perspective. Second aspect is that just these valuations do not mean that buying support is going to be less because, 40% of the new cash in the hands of fund managers is for mid and smallcap buying, which means that despite their seeming over valuation from a near-term perspective, buying support will continue to be there.
So, you might see a situation where before those October numbers come in, the valuations go up even higher than today. So, to say that they are overvalued and hence avoid would not be a right decision because there is liquidity support for mid and smallcaps from the DIIs.