‘Market Bracing For An All-Rounded Move': Investment Expert Prakash Diwan On India's Bullish Trend 

The BSE Sensex and the Nifty 50 are recording new highs everyday. Market experts and analysts are bullish on the India story and some of them are now asking if India will finally be a breakout emerging market this year. The still sluggish Chinese economy further strengthens India's prospects. India seems to be hitting the right notes. However, as we go higher, the quality gap between the headliners and the laggards becomes a little clearer. The valuations are then a cause of worry. 

What is the market reality and where is it headed in the near future? 

Financial journalist and founder of The Core Govindraj Ethiraj spoke to Prakash Diwan, market veteran and director of Altamount Capital Management as he talked about his view and concerns about the markets.

According to Diwan, the market trend in India seems to be driven by two main factors: liquidity and relatively positive earnings. The return of foreign institutional investors (FIIs) has provided liquidity to the market, and earnings have not been as disappointing as anticipated. This has led to exuberance and new highs in the market indices.

However, there are concerns about stretched valuations, especially for smaller companies. The rush of money and the chase for specific sectors or pockets of the market may lead to elevated prices and a less favorable risk-reward ratio. Diwan suggests that the froth below the indices, particularly in smaller companies, needs to be closely watched. "I am more worried about the froth below the indices–the smaller companies that are getting lapped up. There is less quality paper, and more money chasing those names and would elevate the prices to a stage where the risk-reward is not usually very favourable," Diwan said.  

Here are the edited excerpts of the interview: 

What is your view of the present market trend?

The market is bracing itself for some sort of all-round move,  within the different segments-the micro, small, and mid-caps as the large caps start touching new highs. This is broadly driven by broadly two vectors. First is the liquidity with the FIIs making a comeback. Secondly, the earnings have not been as dismal as we thought earlier. I think these two factors explain the exuberance as we scale new highs on the indices at least.

 

Until about a month ago, most global banks were issuing fairly bullish reports on India. While the bullishness continues, we are also now hearing warnings about how the valuations could have been a little stretched. Where are you on that?

That is quite understandable. This cycle has occurred in the past too-global banks being highly optimistic about China, being disappointed, India looking promising, and then Indian valuation starting to stretch leading to a pause. 

My sense is that earnings in India have not yet started losing that kind of advantage. The Nifty EPS estimates have not been revised downwards drastically though have been tempered a bit. But at 1000-1030, the Nifty is still trading at a forward basis, at least about 18-19 times, which is not very stretched.

I am more worried about the froth below the indices–the smaller companies that are getting lapped up. There is less quality paper, and more money chasing those names and would elevate the prices to a stage where the risk-reward is not usually very favourable.

 

You are saying we need to be more concerned about the broad market than the headliners?

That is true. People are rushing to specific pockets–everyone wants a piece of defence, a piece of the capex, or capital goods. Everyone wants a piece of the auto sector where the momentum has started to rev up. So there is this rush for money, for liquidity, and chasing just a few pockets is not very broad-based.

Consider the IPO. The quantum of money collected by some of them, like Idea Forge, and Cyient DLM,  is staggering. So there is a lot of money sloshing around and that always leads to a few bubbles in some of these segments. 

 

As you look ahead, what are you bullish about and what are you concerned about?

I believe that Q1 earnings will be a good indicator of the resilience of the business models whether it is IT, banks, or capital goods. The government is the biggest spender today, and one will find value in any sector-railways or telecom– that has the advantage of government spending. Especially the downstream names rather than the frontliner. For instance, let us say HAL bags a major order. I would be looking at those vendors who work with HAL, especially the second or third-order vendors rather than the frontline names. However, a word of caution. Some of the small and micro caps tend to get excited when the counters are live. Later when the cycle changes and liquidity dries up, many get stuck with their holdings and are unable to exit.

Do you feel that many promoters are getting out? And that may not be a good sign. 

Yes, that is the other important aspect. There have been several instances of promoter selling and the good news is a lot of papers got absorbed. However, insider selling is always an indicator of things to come. I feel this