'Markets are not cheap, but they are not expensive either'

The September quarter (2QFY21) corporate earnings season was a blockbuster one, with big beats and upgrades. Markets have run up too, thanks to a tsunami of money being pumped in. Foreign investors have put more than Rs 50,000 crore in November alone, taking the yearly total over Rs 1 lakh crore. The situation today is dramatically different compared to March-April when Covid-19 fear had gripped everyone, including markets that crashed. PMS Bazaar hosted Mitul Patel, Senior Vice President | Fund Manager – Portfolio Management Services, IIFL AMC in an exclusive webinar to discuss the way forward. Patel is in charge of IIFL Multicap PMS Strategy, which is among the best-performing this year. Here are the important takeaways.

Covid-19 cases peaking

On a 7-day moving average basis, the Covid-19 case count in India number is falling steadily. "In terms of daily death count, we peaked around 1200 and now we are about 500," says Patel. People are stepping out, carrying a mask and a sanitizer.

"We do not see a risk of a major second wave in India," the experienced fund manager stated, adding that risk of second lockdown is minimal while small micro-level lockdowns can still happen.

Economy out of the woods?

With unlockdown in full swing, the recent 3 months have passed by. There are many signals of revival. "Momentum is strong. GST collection number in October is sustainable, the Finance Minister has said. Auto sales are also picking up. Retail loans post moderation are seeing pick-up in October," Patel said.

Coming to other indicators, data shows that unemployment levels are back to pre-Covid times. Manufacturing PMI highest since October 2007. "Government policy action too has been supportive. Policies on labour reforms, on production-linked incentives, on land reforms, on expanding infrastructure and on agriculture have been brought in," said Patel, who has been instrumental in setting up the research desk at IIFL AMC.

Corporate health

Indian corporates have done well in the recent quarters. "As an example, we studied over 1200 companies. We saw that revenue has been better than expectations. Margins are okay. Net profit growth also has been ahead of estimates," said Patel.

Markets may have got a fillip as the doomsday scenarios didn't pan out. "Earnings estimates have been revised upwards and that too sharply. In June-July, expectations were very low. When it was understood that damage is not going to be too bad, markets improved. We see a decent amount of upward revision on cards," said Patel.

Sectorally speaking, IT, HealthCare, utilities earnings have been resilient. "Financials - which is 32-33% of index - earnings growth has been positive from Nifty, market perspective. We are equal weight on banking at present. Industrials is still a lag. But it should pick up," says Patel, who tracks chemicals, auto and pharma sectors.

IIFL PMS now expects corporate earnings growth to be in mid-teens to high-teens for the index. But, Patel also added that obviously, all will not be hunky-dory and there will be some volatility as the path to growth is not very clear.

Portfolio talk

IIFL Multicap PMS' investment strategy is to invest in a portfolio following the SCDV framework (S - Secular, C - Cyclical, D - Defensives, V - Value Trap). It invests a large proportion of the portfolio in quality Secular growth companies which are long term compounding stories. Rest of the portfolio is invested across quality Cyclicals and Defensives while avoiding Value Traps.

"With our SCDV framework, there is a Growth bias. A lot of the portfolio is secular growth in nature. Cyclicals position will be increased as we expect recovery; it is currently about 45% of our portfolio," says Patel, who has allocated 55-56% to Largecap stocks, 22% to Midcaps and 18% to Smallcaps.

Responding to a question, Patel said in the short term, liquidity may be driving up stocks but in the long term fundamentals will catch up.

To a query on investing when markets are all-time high, Patel said that while Nifty at 13,000 is lifetime high, investors should not get trapped looking at a number. "Markets are not cheap, but markets are not expensive either," he stated.

On a question on Pharma sector view, Patel said IIFL Multicap PMS has an overweight position on the sector and its exposure is in the form of MNC, CRAMS and Generics stocks. "We were overweight in April, May, June, but we will not increase exposure. This is because the opportunities in the market are currently in the non-defensive side (pharma is a defensive sector," Patel signed off.

Those who missed the opportunity to hear from the expert directly can listen to the entire session through the link appended below