ETMarkets Smart Talk: IT & PSU banks could turn out to be the Dark Horse of Samvat 2079: Rahul Shah

“I think IT is one such sector where a lot of correction has happened recently and where stocks with an intrinsic value of Rs 100 could be trading at Rs 70 or lower,” says Rahul Shah, Co-head of Research, Equitymaster.

In an interview with ETMarkets, Shah said: “Another dark horse could be PSU banks as they have been massive underperformers the last few years” Edited excerpts:

October which started on a strong note for D-Street seems to be undergoing some global headwinds. Do you think Diwali/festive cheer could lift the D-Street sentiment?
I think the sentiments are more of a mixed bag currently.

While there is a lot of confidence amongst investors about India’s long-term growth story, the near-term global headwinds are proving to be a bit of a dampener.

However, if your time horizon is long-term and you are willing to suffer near-term volatility, this is a good term to build a long-term portfolio of fundamentally strong companies trading at attractive valuations.

What is your take on the recent results from IT sector for the quarter that ended in September? What is your preferred list?
I think the IT sector has been a pleasant surprise as far as the results are concerned. Top-line growth across most major companies has come in better than expected whereas attrition pressures have also eased, thus keeping both the growth as well as margins healthy.

This, combined with attractive valuations, makes the sector a good bet from a 2-3 year perspective.

Among individual stocks from the sector, I would recommend the larger players provided they are trading at close to or a slight premium to their long-term historical valuations.

Smaller or mid-sized players with a proven business model can also be considered, especially the ones that have been beaten down to the tune of 50%-60% from their highs and are now providing a huge margin of safety in terms of valuations.

What are your big themes for Samvat 2079? Where can investors look for wealth-creating opportunities?
There are two ways of looking at future opportunities. You can either invest in stocks where their fair value is Rs 100 but because of near-term concerns or knee-jerk reaction, the price has fallen to Rs 70 or lower.

I think IT is one such sector where a lot of correction has happened recently and where stocks with the intrinsic value of Rs 100 could be trading at Rs 70 or lower. Another dark horse could be PSU banks as they have been massive underperformers the last few years.

Another way of looking at future opportunities is investing in stocks where the fair value could be Rs 100 right now but is expected to reach Rs 150 or higher in 2-3 years.

This could be because of strong earnings growth potential and huge sectoral tailwinds. Themes that are expected to do well from this perspective could be defense and capex-related sectors like engineering.

So, these could be some of the themes to watch out for as far as Samvat 2079 is concerned.

Do you see fresh record highs for Indian markets in Samvat 2079?
I think the Indian markets currently are a one-engine locomotive with support largely coming in from retail investors and DIIs.

The question is whether the second engine i.e. the FIIs will also start firing soon.

If the current recession in the west is like the ones we have had in the past, then things should start looking up over the next few months.

This could also lead to the return of the FIIs in big numbers as risk money starts looking for greener pastures again.

Hence, unless some big black swan event affects the global economy and capital flows, it is quite possible we may see a new high in Samvat 2079.

How are FIIs looking at India, especially after recent US Fed rate hikes?
FIIs would be cautious right now. While Indian markets aren’t very expensive, they are not very cheap either. Therefore, the arbitrage opportunity of borrowing in US dollars and investing in Indian stocks has narrowed down a good deal in my view.

More so, after the hikes in interest rates in the US. In fact, with more hikes on the way, sentiment among FIIs toward India is expected to remain subdued.

What is your take on the rupee? Do you see further depreciation against the US Dollar in the next 12 months or Diwali 2023?
In addition to India’s own weakness on the trade deficit and oil price front, the rupee has also come under attack on account of the US Fed’s hawkish stance and monetary tightening.

Going forward, with both these factors unlikely to ease anytime soon, we believe that the pressure on the rupee will continue to persist.

What are your key learnings from Samvat 2078 and any advice you would likely give investors for the next Samvat?
I think Samvat 2078 was a great case study on how even the best quality and high-growth stocks can fail to give good returns if one pays too much for them.

A classic case in point are stocks like IEX, IRCTC, Tata Elxsi, and Dr Lal PathLabs.

Investors should do well to remember that the greedy Mr. Market is a brilliant salesman. If you have no idea how much you are willing to pay for a stock, the glib salesman that he is, Mr. Market will convince you to buy the stock at any PE multiple.

He will keep on concocting these wonderful stories and assure you the multiple you are paying is not very high.

Therefore, an easy way out of this trap is to fix an upper limit yourself. Decide what is the maximum PE you would like to pay for a stock and stick to it.

You should not budge no matter how good the fundamentals or how promising the growth of the underlying business.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)