Stocks to buy: stick with the mid-cap leaders over the next few quarters: Prasanth Prabhakaran
Are we too frothy? Are we ripe for a big fix? How do you see things on the valuation front and the different fundamentals?
We remain bullish in the markets and the reasons are simple. There is a lot of liquidity in the market and that too at generally moderate interest rates. Our hypothesis is that in the event of a tightening, it would be gradual and this would give ample time for the markets to eventually take it into account. When there is liquidity, it must be accompanied by a reason and this reason has always been given by the reforms that the government has put in place.
He ensured that interventions were carried out at crucial times. In fact, today’s RBI policy is a precursor to what’s supposed to happen. They ended up dealing with areas of high contact intensity. They are continuing their efforts to ensure that the economy gets back into shape.
The last factor will be the effect of the first two – liquidity and reforms. Profits for the last two quarters and next year will continue to improve and will exceed the estimates we have given at this point. Liquidity induced rallies generally cannot be questioned and this is why the markets will continue to recover as there does not appear to be a way to stop them now. Fundamentals usually catch up with liquidity because a situation arises where, as liquidity increases, profits catch up for a while as the economy opens up. Our belief is that there is ample time to continue to grow.
Are you confident enough for the next 6 to 12 months? What feedback do you collect from Indian companies?
We have a fairly significant upsurge that ends up interacting for both institutional clients and individuals. In the case of contact-intensive sectors, our analysts believe that the recovery will begin once the foreclosure is over and the pent-up demand that exists thanks to the foreclosure will start to arrive and there will be a wave of activity that will cover losses that arise. are produced during the first two quarters.
There are also regular segments, whose balance sheets will continue to strengthen as liquidity is available at cheap rates. A AAA rated company will get amazing interest rates because most banks are full of cash and they want to give it to borrowers who have a track record. Even within the MSMEs and SMEs sectors, which have been widely affected, some parts are different. So there are midcap leaders who have performed well. But in the case of the weakest, opportunities for merger and acquisition have opened up. People are ready to sell and go down.
So a strong company with a strong balance sheet and the ability to borrow has a great chance of increasing its balance sheet by reducing costs over the course of a year and a half. The cost reduction has made it possible to focus on top line sales and this is where we expect a huge recovery leading to profit growth.
Revenue growth will also directly increase the bottom line over a period of time due to these controlled costs. It will continue to be a good market to invest in. We should stick to the leaders of the midcap space over the next two quarters. We believe that is the way to play the markets over the next year and a half.
Are you comfortable with the profit growth Indian companies are expected to post from now on? Are you comfortable with market valuations in different pockets and sectors? What kinds of valuations, profits and returns could be made over the next two or three years?
Our research office says we will continue to grow at a 17-18% CAGR. This is much higher than we expected in the past and the reasons are simple. There is pent-up demand, but rather it is the cost containment measures over the past year and a half and the pool of cash that will continue – will boost profits to a large extent. The returns will be much higher than what has happened in the past. It will continue to remain strong and it is a market in which to invest.
Unfortunately, when a market breaks its fundamentals, the fear factor also increases to that extent. If one is skeptical about this, the risk appetite is lower, so the portfolio should be hedged. The juice in the markets will continue for a lot longer. Conservative players may view hedging as a strategy.
We see reach in a lot of areas. The reach has grown in the real estate sector which gives great impetus to associated sectors like building materials, pipes, paints, cement, home improvement. We believe there is a margin in the fact that life insurance is an industry in which we believe. Look at cash distribution companies, brokerage houses, and middlemen in space. We could end up looking at the demat companies and exchanges that are listed. We can end up building a portfolio that can give extraordinary returns, especially above the nominal GDP returns that we expect over a period of time.
Stay bullish. You have to have a belief in the economy rather than looking at valuations. Whatever evaluations exist, they have happened for a reason. The money has disappeared and revalued well-run businesses. It revalued companies with strong balance sheets and companies that have the capacity to borrow for new growth.
What risks should an investor take into account while enjoying these returns?
We cannot only talk about the positive points that have occurred in the markets. Valuations are high, Right now the market has risen thanks to liquidity. In the event that he pulls out, there will be corrections in the bullish rally. But our expectation is that there will be a gradual withdrawal of this liquidity in the system. It won’t happen immediately or at least in the next nine to twelve months.
Liquidity will continue because for the moment the economy has not fully rebounded, neither globally nor in India. So, confidence must be built so that we have time to go through the rally. If you are conservative, cover your wallets. There are many opportunities to go back to your advisors and learn how to hedge your portfolios. The only fear factor that remains is the withdrawal of cash that is still in some time.