ETMarkets PMS Talk: Indian equities fairly valued but need earnings boost, says Sanjay Chawla

Time of India

3 days ago

In the latest edition of ETMarkets
PMS Talk
,
Sanjay Chawla
, Chief
Investment Officer
– Equity at
Baroda BNP Paribas
Mutual Fund, shared his views on the current state of
Indian equities
, global headwinds, and sectoral opportunities.
While he believes the markets are trading around their long-term averages, Chawla emphasised that a sustained earnings pickup will be crucial to justify valuations.
He downplayed the impact of recent U.S. tariff hikes on Indian exports, highlighting that the affected sectors form an insignificant part of the equity indices.
Chawla also touched upon the resilience of retail investors, the temporary nature of foreign portfolio outflows, and the potential in consumption and
healthcare
segments, even as geopolitical and macroeconomic uncertainties persist. Edited Excerpts –
Thanks for taking the time out. With Washington's additional 25% levy—doubling U.S. tariffs on Indian goods to a punitive 50% - how are you reading into this for Indian Inc.?
From a macro perspective, Indian exports to the US accounts less than almost half a percent of the GDP. Then there are certain sectors which are exempted. So the net-net impact would be even lesser.
This is of course assuming the most pessimistic scenario of exports coming to a complete standstill. That is not our base case.
The fact that most countries would have some tariffs would mean that India may not be economically at a disadvantageous position.
Since the sectors which are likely to get impacted are not material part of equity Indices, the impact on the earnings is unlikely to be meaningful. However, the impact may be on a bottom-up basis and more from a sentiment perspective.
Going by the trade negotiations with the other countries, I think the tariffs may settle down on a much lower basis.
Do you think with external headwinds the process of generating alpha will be more challenging?
There are a couple of headwinds- trade barriers, global economic uncertainties, supply chain disruption, geo-political simmering at multiple locations. All these factors are leading to heightened uncertainty.
Most of the factors are difficult to model in a traditional financial sense. As long as one stays focus on long term fundamental factors and usually ignores the 'noise' and manages the volatility, they would perhaps do well.
How are reading into June quarter results of India Inc.?
Till date we have seen about 80% of the companies have reported their earnings. The PAT growth continues to be in single digit. While the earnings are aligned to expectations, the requisite run rate would be higher in coming quarters. It augurs well that festive seasons this time are well spread and come in earlier. It is expected that earnings may improve in the coming quarters.
What is your call on valuations? We have some moderation from all-time highs but can we say that we are in the attractive zone?
Simplistically, Indian markets are trading at long term averages. To make strong investment arguments at current valuations we need to see earnings improve from here on.
Results so far have been in mid-single digits. Ground feedback from festive demand seems to be indicating a much better outlook. If that sustains and is reflected in earnings in coming quarters then current valuations may be justified.
Foreign institutional investors have unleashed a brutal $4.17 billion selloff across five key sectors in July. FIIs turned net sellers to the tune of Rs 17,741 crore last month. Should Indian investors be cautious?
FPIs have been overweight on India for a long time. Recent outflows may plausibly be on account of redemptions, or profit booking or alternative markets being cheaper and offering better potential returns.
In the past also we have seen FPIs selling in the short term only to do a U turn once global factors stabilize.
At this juncture, Indian markets tick almost all boxes from a global investor perspective: Good economic growth, stable currency, deficit under control, visible earnings growth and breath of investible opportunity can be assumed to be available.
Besides the global uncertainty the only factor against Indian investment is slower than historic earnings growth. Once that picks up we may see renewed interest by overseas investors.
Retail investors have played an important role in holding the market. But rising risk could pose a threat?
There is no denying the fact that retail investors have shown remarkable resilience and maturity and have been steadfast in their financial goals.
I think they understand the difference between systematic risk (in terms of GDP, earnings and valuations) and unsystematic risk (global policy uncertainty and geopolitical tensions).
They understand that eventually the domestic economy will do well leading to improved earnings. That is what they hope to capture by investing in Indian equity markets.
From a retail perspective, do you agree that money could start moving towards fixed income space as volatility grips D-Street?
It is very important to do your asset allocation and have the discipline to stick to the same to meet your financial goals. Risk appetite for equity investors is different from Fixed income investors. That is what is eventually reflected in potential return.
The recent tepid returns from equity markets is an outcome of heightened global uncertainty. Once the dust settles we should see earnings growth tracing the nominal GDP.
Which sectors look attractive?
Consumption sector, especially discretionary consumption, should see a pickup. First the personal tax cuts should increase the disposable income of the middle-class. Secondly, we usually see higher spending during festive. We hope to see the same trend continuing.
The Healthcare sector also offers interesting pockets of growth- Hospitals are expanding through brown field expansion, domestic demand is potentially stable. Opportunity in Contract Manufacturing (CMO) can be very meaningful.
This is notwithstanding the potential tariff barriers. However, we suggest that investors should consult their financial advisor and according to their risk appetite consider the above sectors.
(
Disclaimer
: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)