Nifty fairly valued at 17,000-18,000; near Rs 1,000 EPS likely in FY24: Pankaj Murarka

“Our approach to portfolio at this point of time is very pro-cyclical because we think there is cyclical recovery in the domestic economy. We like autos because autos are coming out of a supply constrained environment for the last two years,” says Pankaj Murarka, CIO, Renaissance Investment Managers.

After rallying for nearly two months, on Friday, the market slipped. Would there be a lot more nervousness if you know that the direction of the FII flows or the liquidity situation will change and are you worried about the dollar index at about 107?
When it comes to equity markets, there is always some reason to worry because there’s always something or other which might move in a direction that might not comfort investors. Today it is the dollar index, tomorrow will be oil, the day after it will be something else. Having said that, from a broader perspective, earnings growth has been pretty good in the quarter gone by and in the next couple of months, we will get into the first normal festival season after two years.

I still firmly believe that a lot of pent up demand exists in the economy and amongst consumers and businesses and as a result, the second half probably should be very strong or resilient in terms of growth. Now when you tie this into the market and given the fact that markets tend to discount 12 months forward earnings, India is a market which probably at Nifty level will do something close to Rs 1000 of EPS in FY24.

So at about 17,000-18,000, there is pretty much a fair valuation for the Nifty index and it is very much in line with where Indian markets have traded on an average for the last 15 years. I think the market has reached a zone where it's very fairly valued give or take 5% on either side. The market could remain range-bound at the index level for some time to come and will have stock specific and sector specific moves.

Why have media stocks in this leg of the bull market underperformed – be it Zee or TV18 or Sun TV?
Consumer discretionaries, by and large. to an extent have underperformed over the last six-nine months and that is also primarily because the major advertisers, the FMCG companies have seen a big squeeze in the profitability over the last three to four quarters.

Larger spenders like Levers and Godrej Consumers or Procter & Gamble have gone a bit slow or soft on their advertising spends which is reflected in a number of media companies. As we get into the second half, one company will increase their advertising spends and also their margins will normalise.

The second half should be a year of stronger growth for media companies across the board and probably we will see that growth coming back in advertising spends after a gap of almost two years when media spending was constrained during Covid. From here on, the outlook on the sector remains positive.

TVS Motors is up 90% in the last one year. Jefferies feels that it is just the beginning of a secular trend for TVS because they have got their margins right. It was a weak number three but it has the potential to become a weak number two now?
I would concur with that. Overall two-wheeler sales have been sluggish and we have not seen a meaningful pick up post Covid and that holds true for not only two-wheelers but across-the-board for the auto sector because part of it was driven by supply side constraints which the whole auto industry was facing as well as the margin squeeze that they have because of the rising commodity prices.

Now probably, both of these things are behind us and more importantly, we have a strong demand tailwind across the auto sector, specifically coming to TVS. They have got the strategy right and we have seen pretty robust or healthy monthly numbers coming in which essentially shows that they have been gaining market share.

The strategy in terms of the tie-up with BMW is doing pretty well for them and probably now with strategic initiatives on EV as well, it seems they have a thoughtful strategy in place in terms of what they are trying to do. So yes, TVS could be an outlier in that sense gaining market share in an industry which is otherwise fairly mature in that sense.

What are you looking to buy at a 5% decline and add more at a 10% decline? Would you leverage at a 15% decline?
Our approach to portfolio at this point of time is very pro-cyclical because we think there is cyclical recovery in the domestic economy. We like autos because autos are coming out of a supply constrained environment for the last two years. We have not really seen the demand buoyancy which we should have otherwise seen had the sector not been supply constrained. On top of that, the margin headwinds that the sector was facing will recede and the underlying demand remains strong for auto as a sector.

Most of the passenger vehicle companies have a very strong order book or a waiting list of cars for them and the same holds true for commercial vehicles as well. Auto as a sector looks pretty exciting from a next one to two years’ perspective and likewise, capital goods as a sector because we have seen clear trends where order intake for most of the capital goods and engineering companies have increased very strongly now for almost three quarters in a row.

That is a very clear and strong signal of revival of the investment cycle and the robustness that these companies are witnessing in their order intake which will translate into revenues over the next few quarters and years. Both these sectors clearly stand out.

Apart from that, we are also excited about internet as a sector. A lot of these companies which came out with IPOs, after sharp corrections are much more reasonably valued now and given the correction in stock prices, I would like to believe, there has been some sort of a pressure on these companies to bring forward their break even point. The underlying growth in these businesses remains very strong and some of these businesses are very strong franchised. On any corrections, we would certainly be looking to buy into some of these internet companies.

Would you extend your list to new age Internet companies? Zomato has fallen quite a lot?
Absolutely. Look at some of the other traditional industries like steel or cement which have been around 50 or 100 years and there are still 50 plus meaningful cement companies or at least 10 large steel companies in India. But in this new generation business, when you talk about food technology, which is an industry that is 10 years old and we already see consolidation in place because two players control 100% of the market. The industry is already in oligopoly. Strong growth in an oligopolistic industry is always value accretive for investors over a longer period of time.

So a lot of these businesses have seen very massive consolidation at a very early life cycle and given the dominant market share of some of these players, it really excites me from a medium term to longer term perspective.

So what is the right way of looking at say a Policybazaar? As of now, there is no parallel in terms of platform but we do not know what will happen to their edge which is technology and distribution arbitrage?
At a slightly higher level. It is my view that the world is in a digital transition. Probably 50 years out, all of us will be living in a world which will be completely digital and this so called businesses which we in today’s parlance called new age businesses or digital businesses, over the next 10 or 15 years will have an edge over traditional businesses.

Some of these companies which today are sort of midcap companies, will become some of the leading companies of India 15 years out because of the digital pivot and the edge they have is a very strong moat in their business and we should not underestimate the potential of that.