Benchmark equity indices in India touched a record high this month. Sudip Bandyopadhyay, group chairman of Inditrade Capital, says markets are likely to continue moving up as India remains the best placed among the BRIC economies to attract foreign capital.
However, stock selection is going to be important now, he tells THE WEEK in an interview.
Q. Equity markets have touched a record high this month. What’s driving this momentum, considering there are still challenges from geopolitical tensions, inflation and interest rate hikes?
There is one single factor that is driving Indian markets and that’s liquidity. During the pandemic, the central banks across the world pumped in a lot of money and capital markets flourished. And generally, the risk-on mood was there among global investors. Emerging markets like India got a lot of liquidity.
During that period, a lot of money was raised for emerging market (EM) funds. What are the emerging markets? BRICs - Brazil, Russia, India, China. These EM funds have got huge amounts of money, which they have deployed or are ready for deployment or have to be deployed. Now, Brazil has elected a left-leaning president, Brazil’s economy is topsy-turvy with commodity challenges. We all know what's happening in Russia. Hardly any sensible investor will go and invest in Russia now. We all know what's happening in China over the last two years. Forget Covid; the Chinese government has systematically gone after sectors. Again, investors don't know how to take money out of China. That leaves the investors with only one out of the BRIC, which is India. And in spite of everything, which is around us, we still will have a GDP growth of 6-7 per cent. Under the circumstances, which you described, geopolitical challenges, and a whole lot of other issues, that's pretty good. So, money will continue to come to India. That will in itself push the Indian market upwards.
Indian corporates have also done well. They have managed costs very well, trimmed their balance sheet. They become much healthier, compared to what they were pre-pandemic also. Finally, Indian retail investors, and Indian HNIs are investing their own money. So there is no panic. In 2008-10 market crashed because of panic, because people were leveraging and investing. Today, Indian investors are not that leveraged. That provides significant stability and a bottom for the Indian markets.
Q. But, at these levels an investor will have to be cautious right?
I completely agree with you. Markets have moved up. Our belief is the market will keep moving up for the next one and a half, two years at least, because we think that this trend is going to continue, the liquidity moving into India Indian corporates doing well... The fact is, individual investors or retail investors don't have a finite time. So they can't be waiting patiently infinitely. So they need to pick the stocks carefully so that they can reap maximum rewards within a specific time frame. There are stocks in sectors, I won’t say underpriced, I would say reasonably priced. So that's what will give the investor rewards and that's what foreign investors are also looking at now. Indian markets will still attract money because India, in spite of the average PE between 20 and 25, still has a lot of potential.
Q. Talking of sectors, banks have run up a lot in the last few months. Even PSU banks like SBI have seen a lot of upmove on the back of improvement in balance sheets. What’s your view on the sector?
The ingredients were there for the PSU banks rally to happen. The economy has started doing well, credit demand has come back. Deposit this, mobilisation was happening and asset quality improvement was happening. So, the entire industry is doing well and will continue to do well for some time. Private banks like ICICI or IndusInd or even Axis, all of them have moved up. At some point of time, the PSU banks were bound to catch up. Will they trade at the PE multiple of ICICI Bank? Definitely not. But some of them will catch up, and that's pretty much what is happening. Even today, there are still some PSU banks, which are attractively valued compared to even the PSU peers.
Q. Within banks, however, HDFC Bank has not moved up a lot. What is the hangover there?
There are two-three things. They had a lot of challenges with the technology and RBI had stopped them from issuing credit cards and all that and that did create a significant challenge for the bank because that was the way they used to add new customers and new cards and things like that. Now that stoppage did affect the business. And of course, while in the long run, it will be good, the merger with HDFC Limited, created a lot of confusion. The balance sheet of HDFC Bank, whether it's ready for that merger or not, was the question in terms of SLR, handling the liability book of HDFC Limited... That was the question. So I think these two things really created the negative aura. Having said that, we strongly believe that if somebody has to pick a private bank, HDFC Bank probably is a good buy now, because it will do that catch-up. Things are falling in place. The merger will happen. RBI has removed the restriction on their card issuance.
Q. Where else is the pocket of opportunity right now other than banks?
I think, all this import substitution, export substitution, which is happening, because of China plus one etc., that's a genuinely big opportunity. We have seen that getting played out in specialty chemicals. The government’s PLI (production-linked incentive) schemes have come as an absolutely timely intervention. Every global, large manufacturing company wants to move at least a part of the supply chain out of China.
India is large and it has a very large domestic market as well. That's a big attraction. There’s a big opportunity for Indian manufacturers, whether, its a specialty chemical, or tyre or anything, which can now become a part of the global supply chain. We've seen it getting played out in a really small way, it can get played out in a very big way.
Q. Talking of manufacturing, what do you think of this whole automobile pack, where some companies have done phenomenally well, but the entry-level not so much?
Automobile has components to it, passenger vehicles, commercial vehicles, two-wheelers, and tractors. As far as four-wheelers is concerned, people are getting very excited about electric vehicles. Some people are buying those shares and getting excited. Tata Motors has already got new vehicles out, they have got fantastic valuation and all that. But I'm a little skeptical, honestly, because we have not seen this movie yet. It's just a trailer. Somebody coming six months down the line, they could come with a better product and better technology and beat you. So I would like to wait and watch.
I would rather play through the auto-ancillary space. The ancillary guys have got much more flexibility. The manufacturing guys say wipers are now part of the global supply chain. The same wiper will go in EV or an ICE (internal combustion engine vehicle). So these guys are much more flexible. And overall automobile market is increasing.