India remains a very attractive investment destination from a 5-10 years perspective: Jitendra Arora, ICICI Prudential Life

"As a fund manager we will have to try and see that what are the sectors that are likely to do well in the near term as well as over a longer period of time and try to a strike a balance between the two when we are looking at investing into the markets," says Jitendra Arora, ICICI Prudential Life.

We have seen that for the last few quarters retail investors, mutual fund, HNI category and PMS have become quite self sufficient. What do you make of this change in the trend that we have seen in the last 12 to 24 months?
Honestly, it is a very welcome trend for the Indian equity markets as more and more savings can get diverted towards equity. However, FIIs still make a good chunk of investors for Indian markets. So if we have the domestic flows while the FII flows are coming then it is even better. It is like more the merrier. But if only one category of investors are investing and the other set of investors are exiting the market then obviously will see some volatility or some kind of correction either through price or time.


Do you expect these flows to be sticky in nature? Do you expect the flows, the fund size or mutual funds to only increase from here on?
Overall we are seeing more savings getting channelized towards equity markets over last two to three years and we believe that there is a base level of flow which will remain sticky into equity markets. Having said that on top of that there is always a lump sum flow which can move into either direction depending on where the markets are at any given point in time. But overall we see close to around Rs 90,000 to Rs 100,000 crore of sticky money into Indian markets from domestic savers annually.

In terms of Indian markets what do you make of the so called high valuations? Do you think again that it is a structural shift that people are talking about? Is that something which people are comfortable with now that we are paying slightly higher but we are getting more stability in India than what it was earlier?
I will tend to agree with that in the sense that there are three components to the price to earnings or market valuations.

One is obviously the composition of the basket. Now I would want to highlight that Indian basket for both the Nifty index has changed materially over last 15 years from lot of medium to lot of PE stocks to lot of high PE stocks with more and more consumer stocks coming in. So inherently there has been a shift in the PE of the index itself.

Second, compared to the rest of the global markets when you look at India, it still perhaps presents an opportunity where you can see that the GDP growth itself can be in double digits on a nominal basis over next decade and we have realised that the long term GDP growth translates into the earnings growth. It is a large market which can absorb flows so to that extent it remains a very-very attractive destination for the investor who are looking at market from a 5-10 years perspective and that is what perhaps justifies our premium to a lot of other emerging markets.

Having said that there will always be points in time where people will see that may be you are likely to see a correction either in terms of time or in terms of price and that is a point perhaps where markets will give an opportunity for new investors to come in and old investors to perhaps book some profits out.


So where are you putting your money as a fund manager? How are you managing in this market? What is your approach towards investing? Is PE or valuation now one of the key criteria because some of the sectors and stocks are really valued pretty heavily versus their averages?
Yes, so obviously as a fund manager we will have to try and see what are the sectors that are likely to do well in the near term as well as over a longer period of time and try to strike a balance between the two when we are looking at investing into the markets.

Personally I find lot of sectors attractive at this point in time. Financials being one especially the large banks. Telecom is a sector where we are overweight in addition to that we still have some exposure to high PE stocks where we believe that the growth can continue to be very robust over next few years and these six months to a one year blip perhaps should be used to increase our exposure to some of these stocks.


When we look at the sectors how would you look at domestic versus the new-age economy? People are factoring in very high growth and, of course, growth is something which equity will always look at but how would you look at the traditional businesses. Do you think that is the space where investments can be done as manufacturing, cap goods have also seen a rally after a very long period of no interest from investors?
Today if I look at the PE multiples for lot of capital goods businesses they are also competing with the new-age businesses. There are capital goods companies which are trading at 50 to 60 times multiples so obviously they are also trying to factor in lot of growth in the coming time period and that is in line with many consumer businesses where at least we have seen that those have compounded at that rate in terms of earnings as well as top line.
So to that extent we are trying to strike a balance wherever we can find opportunities in this market without trying to get swayed by the ongoing narrative per se.

We have also seen that there were a lot of technical reasons why some of these new age stocks saw a lot of supply coming in? Do you think it is an opportunity to buy or only when the free float is actually very high the real valuations of stock come out? What does history tell you?
Honestly I do not think history in Indian markets will be very relevant here because some of these businesses we are seeing for the first time. Apart from the technical factors, we should also not forget that we have seen a rise in the interest rates which mean the cost of equity itself has gone up.

So, when we were valuing these new-age businesses let us say one year earlier, we were looking at a certain cost of equity and suddenly we realise that now that cost of equity has to be shifted up and that should lead to some kind of correction in the valuations of these new-age businesses. Also, the profitability still remains a challenge for quite a few of them and even though they are guidence for profits, market would want to see that once they turn profitable what kind of growth can they show.

We understand that there is always a trade-off between profitability and growth so obviously this will be a period where we will see lot of volatility in these names and obviously there will be levels at which we would want to buy these names from a long-term perspective. Overall we are turning more constructive on some of these new-age businesses per se.

In terms of real estate we have been speaking to a lot of companies right from DLF to Prestige to Sobha and all of them are talking positive trends and positive demand. What is your view on real estate as generally you would say that in such a fast rising rate environment avoid rate sensitives like real estate? Do you think this time it is different?

For the near term I believe the real estate demand continues to look robust because obviously we have seen a lot of wage increases across a lot of sectors in the last two years driven by technology sector at the forefront.
And we have also seen good job generation in some of these sectors which is in turn driving demand for a lot of real estate across the cities.

So in the near term it is likely to be robust but obviously the impact of interest rates is yet to be seen in terms of demand. But I think it looks good to me for at least another two to four quarters.

What do you make of the underperformance from the large IT names?
If you see on an average where this large IT pack was trading before Covid and where it is trading now you will realise that perhaps this large IT pack is still trading at a premium to where it was trading on pre Covid basis.

Obviously that premium has been driven by two things; one was the kind of growth these names have shown and also a belief that structurally perhaps we can see 100 to 200 bps higher growth from the industry per se over the next four to five years given the changes that are happening in the global markets and where these companies stand to gain.

Now along with that we are also having a situation where US is expected to slow down dramatically whether it is soft landing or whether it is a recession is yet to be seen.

So that is what is leading to this uncertainty where markets are trying to find a level where these companies should be trading. So I do expect the sector to continue to be volatile but maybe in another two quarters we should see perhaps wherever it is from there on we should be very constructive on this sector because by then we would have seen whatever demand patterns to emerge would have emerged by that time.

The IT sector itself has become vast, something like a MindTree has really become big. Also, Coforge has really become big in terms of size. How would you look at it because earlier it used to about Infosys, Wipro, TCS maybe the top three, four but now are you expanding your horizon?
Yes, definitely one has to expand the horizon because clearly there are times when the size makes you eligible to sit in certain deals where you were not able to sit earlier. So suddenly your addressable market in some ways goes up. So some of these midcap companies are now coming into that bracket of top line where they can participate in more and more deals and as a result try and win more deals by competing with some of these large cap names. So to that extent we can see that growth maybe higher for some of these names over a period of time and as an investor one has to be open to looking at them.

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