Value will continue to outperform growth for next 6 months: Sridhar Sivaram

"When you see sharp moves, money tends to move out of markets like India. So that's what we are seeing right now," says Sridhar Sivaram, Enam Holdings.

Not all is great for Indian markets, right? I mean, I do not know whether it's coming at the back of underperformance vis-à-vis China because suddenly they have lifted all their curbs and a lot of money is moving into that market.
Yeah, I think last year India had a very good year in terms of outperformance from the emerging market standpoint and the big underperformers were North Asia, China, Korea and Taiwan. Those three combined are almost 60% of the emerging market benchmark. So we are seeing a comeback from them. I mean, China in the last three months is up 50%. That's a 30% benchmark weight for MSCI and that's up 50%. That's a massive move for a market. So I think when there is volatility in emerging markets Indian markets don't do well. Markets like India do very well when the markets are down or if it's a steady move. When you see sharp moves, money tends to move out of markets like India. So that's what we are seeing right now.

But is that a knee-jerk trade? You know, that's the question. Or are you going to see a long-drawn patch of India underperformance relative to other emerging markets?
No, I don't see a long-drawn patch. I think it is more tactical right now because large markets are moving very fast and India was a consensus overweight. In fact, it wasn't a consensus overweight till about third quarter of last year because we were seeing continuous FII outflows.

I think the FIIs are chasing the market right now. So I am happy that I am not an emerging market fund manager right now because these are very tough markets to manage right now.

But I think overall, I would say over a period, India will outperform. But short-term underperformances are possible. Plus, India's on a valuation basis is more expensive than what it is normally.

Still it is.
Yes. I mean, it has always treated at a premium, but currently that premium may be one standard deviation higher than normal. So that's where I think we are. So these are times when India may underperform.

So we should brace ourselves for another 5-10% downside from here? I don't know.
Even it could be a time correction for all. I do not know what comes in the Budget because there are a lot of rumours about changes in capital gains and stuff like that. We do not know what will exactly come. So I think the markets are a bit nervous also on what happens on 1st February. If nothing happens, the markets will rally. And if nothing major happens, a little bit of tinkering around, I think it is priced in. So we will have to wait and see how the markets take.
But I think post that, earnings would have been also over. We are seeing some softness in earnings. So let's be fair that we're seeing a K-shaped recovery and anybody who is in the middle to bottom half is seeing some sort of challenges in terms of growth. And we are priced to perfection as far as growth is concerned. So our own view is that value will continue to outperform growth, at least for the next six months. And then once growth comes back, then that is maybe the time to relook at the very high price growth stocks.

Value will continue to do better than growth. Does that mean you are still cautious on IT, not convinced by the earnings that we have seen so far?
No, I think for IT, the challenge will come for next year, which is we will know how the year is going to pan out once Infosys comes and gives the guidance. If they come and give single digit guidance, then I think they may have some more challenges. We will know more because typically when US or Europe enters into a recession, discretionary spending gets cut first and IT budgets form a part of that. So any change in the IT budget would have an impact on the earnings and the revenue growth for Indian IT companies. So we have already seen some correction. Maybe a lot of it is already priced in, but we would want to wait for some more time. So we are underweight. It's not like we're zero, but we are underweight on that sector.

But still you're more positive on the large caps, because while I do take your point that discretionary spend is the first to go. But if you look at the commentary coming in from the global banks after their earnings Citi, JP Morgan, Wells Fargo, are all talking about how technology remains one of the focus areas and the fact that they are not cutting the spends for now. I do not know what pans out three months from here. But do you think the correction is a bit overdone? And if you have a two to three year time horizon, it makes a good positional trade?
Yes, maybe from a two to three year standpoint. But as you mentioned that they are not cutting the IT spend. The question is, are they growing the IT spend? So we are paying for growth and we are paying for growth, which is not single digit. We are paying for growth, which is at least in mid teens. So I think it is a question of expectation versus reality. And once that settles in, then I guess these stocks will be right, which is why I said that value versus growth right now, because a lot of the growth stocks, actually IT is not really that highly priced so they are somewhere in between.

But it is a cyclical industry. So we have to first accept that they will have cycles where growth will be slow and they will have cycles when growth is higher.

So does the comfort at this point in time lie in the financial sector, because it really seems to be the expectation that this year is going to be very strong for banks across the board?
Yes, so we are very bullish on financials. I know it is a consensus trade now, but we are bullish both on the private sector and on the PSU side. We think that as one of the large bankers said, this is a Cinderella moment.
I think the big thing for financials is that the credit cost seems to be falling very drastically. And the new NPA accretion is far lesser than what even these banks are projecting for themselves. So for the moment, this looks like all the stars seem to be aligned right now.

But tell me, within that also, would you want to perhaps change allocations? Because the problem of the high PE stocks and the overall consensus is now posing to be a bit of a challenge for an ICICI Bank and a Bajaj Finance. We saw that after Bajaj Finance's Q4 updates. HDFC Bank has been a no-go because it continues to have that overhang of merger. So do you now change the composition and the allocation within banks and financials?
Within banks and financials, we are overweight on banks. We prefer banks over NBFCs. So that's the first starting point. And within banks, we were amongst the early ones to get into this whole PSU bank trade back in early 2021. And that time, it was more like a trade. But as things are playing out, it has become more than a trade because they are consistently delivering very good results. We saw one of the smaller PSU bank declare results yesterday. They had 1.3% ROA, 25% ROE, almost 97% coverage. They are actually challenging private sector numbers now. Not all of them, but you can pick and choose from the entire basket. And having said that, on the private sector banks, I think the growth will continue. In some cases, as you mentioned, there is challenge of merger and stuff like that. But we will look through that given that we are long-term investors.

But we think that banks are better positioned right now because the regulatory arbitrage for the NBFC versus the bank is significantly getting reduced. In fact, there is more regulation now for NBFCs than before. As a result, I think eventually large NBFCs will have to convert themselves into a bank, if not today, tomorrow. So we are better off with that is our view. We could be wrong, but we prefer banks over NBFCs in the financials basket.

Market has been romancing capex as a theme right now and that is where you kind of spot value because most of these stocks are still very cheap and not everyone sort of caught on to the train or bus whichever one you want to pick here. Where do you stand on this capex theme and what is the best way to play it?
Actually the capex story has been a bit of a start-stop. I mean lot of capex was announced but when we speak to some of the larger companies they are still saying that the actual order placement is still a bit slow maybe because of what happened last year with all the geopolitical issues.

We have seen some bit of pullback so I think it has become very stock specific where companies have a lot of orders or the visibility is good. We are quite bullish on the defence side so there at least from the government side we know a lot of defence orders are placed plus there are offset related companies where India is becoming offset partners to some of the global defence companies. Those seem like some very interesting option on the capex side.

As I said it is becoming very stock specific bottom up rather than what we saw in 2003 to 2007 where you could just play all capex related companies and all of them doubled and tripled because the order flow was so huge. We are seeing very stock specific market right now.

Defensive as a place that as of now you would not be looking at closely apart from IT and pharmaceuticals.
Pharma again is becoming very stock specific as a lot of these companies have issues in terms of the pipeline and some of the companies are having issues with USFDA in terms of inspection. But we are quite bullish on some of the pharma companies in the CRAM space so we think there is opportunity there.

When you say you are more positive on value versus growth we have talked about the public sector banks which was one undervalued space per se. Which are the other spaces where you are seeing deep value? Are you looking at the likes of power sector, infrastructure stocks where you are seeing value or which is the other pocket then.
The power sector is another option. But be cautious on what you are paying for and be reasonably sure about the earnings prospects of the company because as we have seen with this results also that any disappointment is being treated very harshly by the market. So you are better off having some margin of safety.

Does two-wheeler also provide pocket of value? Do you think that is where we can see upside because it has done nothing with respect to what has happened to passenger vehicles and commercial vehicles?
We are actually avoiding the two wheeler space because there is a lot of disruption that is happening. If you see around what is happening say even in BKC or any of the others you are seeing the small scooty type two wheelers which are floating around.

On the point that you were making about the budget just wanted to understand how big an event could it really turn out to be because I am not quite sure whether LTCG any tampering would happen there because the tax collections are absolutely robust. It is in any case taxable income which you put into the market. So that whole assumption of taxing and further increasing LTCG does not fit the bill right now. But would it really be a market moving event?
If I connect the dots and listen to what Mr. Bajaj had to say and some of the other comments that we have seen, they are basically talking of rationalizing the tenure for long term.

Today if you see the long term capital gains for equities is one year, for real estate and REITs it is two years, and for debt is three years. So you are really talking of rationalizing this, it is highly possible that everything moves to three years. The second is that the difference between a long term and short term is only 5%. So you are talking of 10% for long term and 15% for short term. That seems too less. It is highly possible that 15 goes up maybe to 20 worst case to marginal tax but we will know in the budget.

The other thing is that the government is looking at rationalising all savings products which are tax free today. So they have already sort of plugged the loophole with capital gains which say insurance and ULIP. There are other insurance products which are tax free so what we hear is that that is the other possible tinkering around which the government could do. We do not know how and why this plays out and what all will come out of it.

So it is not such a non-event as it has been in the previous year?
That is what I am saying and all these are there in the public domain. So you see more, a lot of this. It has already been written and discussed. In fact, Mr. Bajaj went on to say that I had already discussed this at the previous budget. And I am surprised that the market did not discuss this more. I mean those who were telling signals that something is cooking there; we do not know exactly what.


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