Equity markets can easily offer 9-10% gains

Tone down return expectations from equity markets to maybe 9-10% per annum and there will still be more than enough opportunities to invest in, says Sunil Singhania.

ETMarkets.com
Whether the demand lasts beyond three-six months is something we have to see but at this point of time, it seems to be a lasting kind of an environment, says Sunil Singhania, Founder, Abakkus Asset Manager.

We are less than 3% away from an all-time high on the Nifty. Considering that we are staring at political uncertainty in the US, mild recovery in the economy and the second wave of coronavirus in Europe, are you pleasantly surprised or shocked with the strength of the market?
As a perennial optimist and a perennial bull on the equity markets, anything which is pleasant is always welcome. Having said that, as far as the US elections are concerned, the positioning before the elections was so cautious that we were very convinced that irrespective of the verdict, the market will have a near-term bump up and that is what is happening.

Mr Biden right now has a greater probability of becoming the president but if 10 days or a week back someone had told us that this election is going to be so close, we would have been very negative on the market. The same thing happened in 2016. No one expected Mr Trump to win. There was a shock in the market and then we had the bull run of our lifetime. So the positioning this time was so cautious that it was very obvious that the market at least in the near term would have a big run up and that has already happened.


Post that, I would say that we are in a position to consolidate. On the economy front, there has been a mild recovery but it is much better than what the most optimistic analysts or economists would have expected even two-three months back. GST numbers have come back to normal. PMIs are at multi-year highs. Car sales, two wheeler sales are at multi-year high. So it has been a very strong recovery and more than that, the earning season this time has been rocking. Whatever results we have got so far, across-the-board, there has been massive outperformance and unlike June, it is not one or two sectors which are performing this time. It is across the board. There is cement, steel, banking, pharma and IT.

The last point which you mentioned is obviously a worrying factor. The number of Covid cases are daily moving up globally. It is almost half a million cases a day. But the good thing is that, the mortality rate has not gone up and we have to live with it. We have to take a lot of precautions but it is not going to be the end of the world. In India, particularly, the cases have been going down. The economy has been opening up. Even in Maharashtra, almost everything has opened up now. So there is optimism and we do hope that in the next three-four months a vaccine is unveiled. Things are much more optimistic than they were a couple of months back.

Can we expect the demand to stay permanent and is the earning trajectory now likely to improve?
Everyone is living by the month. No one is sure about whether this demand is going to sustain or not but there are a few anecdotal evidences which make us more positive. One, the number of job losses have been much less than expected. The biggest driver is the reduction in interest rates across the board. So whether it is EMI for cars or EMI for houses, there has been a massive fall and particularly in the case of residential sales, EMIs are down from Rs 1050-1100 per lakh to as low as Rs 750 a lakh and that is driving a lot of demand.
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We have to see if this will continue but at least 50-60% of the Indian economy which is non-urban has seen no Covid impact. In fact, because of the excellent monsoons over the last two years, agriculture production has been good, agricultural prices have been pretty robust and rural income has been unaffected during this whole lockdown. Hopefully as the urban centres open up, there will be an added wave of consumption demand. Whether it lasts beyond three-six months is something we have to see but at this point of time, it seems to be a lasting kind of an environment.

Good news and good prices do not come together. Are prices good now because for markets to keep on going higher, you need some support, you need some surprise?
When you see the prices which were prevailing in March and April and you see the prices now, you wish you had the leverage yourself and bought much more than what you did in April. But that is always the case in hindsight. Things are much clearer and easier. Having said that, yes there are stocks which are doing well and prices are also reflecting that but there is more than enough sectors and stocks where there is still a little bit of apprehension.

Good financials is a segment which has done well in the last 10-15 days and they have been one of the reasons why the Nifty is where it is today despite one of the largest index heavyweights having lost 15-20% over the same period. But there is a little bit of apprehension and there are opportunities. I would say the broader market still has opportunity and the most important thing is that in alternatives to investments like fixed income, one is making 3-4%. So one can tone down return expectations from equity markets to maybe 9-10% per annum, you would still find more than enough opportunities to invest in.

You have got a lot of IT stocks in the portfolio you manage -- HCL Tech, Route Mobile or even Mastek. Why is that?
The world is changing and the way we are working, the way we are studying, the way we are consuming, the way we are entertaining ourselves has completely changed over the last six months in particular but it is a trend which is going to continue.
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We are a little bit value oriented investors but if the growth rates are 40-50%, you are okay giving a slightly higher valuation. We are averse to investing in companies which trade at 80 PE and where the growth rates are 5-10%;

-Sunil Singhania


Every company has to have a digital kind of a framework. You need to work from home, you need to have good systems and that would lead to more and more demand for IT generally. As far as Indian IT services companies are concerned, there were a number of question marks in the runup to the US elections. There are H-1B visa issues and despite that, the sector continued to grow in the lockdown. In fact, the margins went up because it became more efficient. Work from home has led to margin expansion.

On the other hand, the whole advent of doing everything in a digital format has opened up avenues for new businesses and in India, a lot of these new businesses tend to be in the private domain. There are a handful of companies which make it to the public markets and our view is that a), these businesses are going to grow fast; b)they have a long way to go because they are very nascent. And c) there are hardly any such businesses available for investment on the listed space.
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Our view is that good quality companies are cash flow generating companies and there is a lot of visibility as far as their earnings are concerned. We would rate them much higher than the so-called consumption stocks where growth is limited, the PE multiples are 70-80 times and the cash flows are similar to these companies. That is what we have been playing for and so far, it has worked very well for us.

UPI payment has increased and the amount of digital payment transactions which we are doing now is increasing at an insatiable pace. Is that a theme which you are playing in your portfolio? You have Route Mobile. Looks like you are betting on digitisation of payments?
Earlier, you had to carry a wallet with some notes in it, I do not even remember whether I have a wallet in my pocket nowadays because everything can be done through your phone and through the digital mode. If you go to some of the other countries like China, no one even accepts hard currency and this is going to become the norm even in India.

With digitisation, with UPI and such a very efficient payment mechanism becoming the norm of the day, you need security, you need a little bit of extra layers of authentication and the companies which are involved in this -- whether through the OTP route or through the WhatsApp authentication routes are going to benefit a lot.

India is a large country and the number of transactions are growing. Any company which will benefit out of either the payment gateway space, the authentication space or even the digitisation space is the biggest fintech opportunity which is there and it is not only in India, it is catching up globally.

In fact, UPI has done phenomenally well in India and it is now being exported to other countries. India has been at the forefront of adopting the best technologies at the cheapest costs and more and more countries will embrace that. The opportunity for Indian companies in this space is not only in India but it is a global opportunity.

You have always said that you like to buy things which are cheap, buy companies which are growing at 15%, which are available at a PE of less than 15 and have return ratios of 15%, 15-15-15. Do some of your recent investments qualify for that cut?
At the time of investment, they qualified and frankly I will say that the profit growth in some of the companies which are tacitly referring to will surprise and we just have to see. We continue to be very confident about our investment philosophy.

I would just add one thing here; yes, we are a little bit value oriented investors but if the growth rates are 40-50%, you are okay giving a slightly higher valuation. We are averse to investing in companies which trade at 80 PE and where the growth rates are 5-10%; that does not justify. So, if the companies are growing at 40-50%, it is a matter of maybe a couple of years that you will start to see their PE ratios are much lower than what they appear to be right now.
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