How are you looking at the markets at this juncture post the sharp selloff that we have seen in the last three odd months? Are the valuations now looking attractive at this point and how are you looking at earnings growth going forward from here?
Sanjay H Parekh: So, basically, earnings have been tepid. Q1 was weak, Q2 was also weak for Nifty companies. And as we see on a top-down basis on Q3 as well, looks to be tepid. And it could be weaker in certain sections as well. So, while the earnings have been downgraded after the Q2 and I think broadly the expectation is this year we should end at 1,050 and next year more like 1,200.
So, what we think is that the price correction is largely done. We could see small bit here and there, maybe around 23,500 but then the risk return gets favourable, but the time correction can happen because markets would look at Q3 earnings which are going to be weak as we see right now. And then the outlook for Q4 should get better and that will be the base for next year.
Besides the weakness in quarter two numbers that we saw, there are couple of global headwinds also whether it is in terms of the dollar index strengthening, the Trump tariffs, or the lesser rate cuts from Fed. So, what is likely to move the needle for the markets going ahead now?
Sanjay H Parekh: So, one, the positives first, at least in my career, I have never seen all the balance sheets been very-very strong in India. We are in a very-very sweet spot in the world. In fact, perhaps the best, right from government balance sheet in terms of fiscal deficit, we will see a roadmap of further reducing it, and a glide path of reduction in fiscal deficit which augurs well for interest rates being lower.
RBI certainly has a very strong balance sheet and balance of payment situation is also very good. Corporate balance sheet has the lowest leverage. Banking balance sheet is best ever. There is some inch up in microfinance and PL and credit card. I mean credit cost will inch a bit, but nothing out of control. And household balance sheet, at least at the top end, is superb. Yes, on the rural piece and the lower strata, there balance sheet certainly is an issue, which we are seeing in terms of spend not happening as much as required.
So, overall, the balance sheets are very-very strong. We have seen near-term growth slowdown in GDP and earnings, that because also of the government spend not happening, it is really back-ended.
Even in the third quarter, just in the last month, we are now seeing some revival in capex. So, fourth quarter will be very important for the government spend to pick up and also some of the state capex to pick up based on their abilities, the balance sheet of the respective state, so that will be very important for the base to be formed. And I am very hopeful that Q4 should look better, but certainly it takes time.
Then which are those sectors that one should watch out for 2025, which could outperform the entire market and investors should have these stocks or sectors for 2025 at least?
Sanjay H Parekh: So, one what we believe is we are going to have a back-ended return this year. Overall, in Nifty if we can get 11-12 times, because if we take earnings at Rs 1200 for 2025-2026 and given India broadly should be around 20 times, then we are talking of 24,000. Then, we move to 26, 27. It is a little early, but let us say broadly, nominal GDP plus growth if we take it is 1350 should be the broad earnings.
As I said, it is still a little early, then we look at 27,000, that is from next March. In the next 15 months you could see 14-15% return, that is 11-12% annualised, so that should be the return expectation and that would be more like back-ended based on how the outlook for Q4 looks.
And then global scenario also is quite fluid. In terms of sector bets, we have been domestic overweight and global underweight. By and large, it is worth barring IT in the last six months.
We have reduced the underweight, but we still like the discretionary space. There is a slowdown in the near term, but secular business, it cannot be such a slowdown.
We like banking. Overall financials we like. Within that, banks, we like larger banks. We also like capital goods. Pharma, we were mild overweight. We are underweight on FMCG, steep underweight, and we do take active calls. We are zero on oil and gas. And then telecom, we are overweight.
Logistics, we are overweight. Power and utilities, we are overweight, so that is the way we think about it. But all this will be based on valuation. We could manoeuvre the sectors based on the attractive valuation of the respective sectors.
Also, you spoke about the sectors, but will 2025 be a year where the broader markets outperform or will the largecaps come and take the centre stage given the kind of selling that is happening by FIIs in the largecaps?
Sanjay H Parekh: So, you said it right. The ownership of FIIs is in largecap and that is where their selling does have an impact. I did discuss valuation being a bit back-ended, but when you look at mid and smallcap which has done very well, I think there are too many funds and be it direct, retail, mutual funds getting more flows, a huge amount of interest was seen in QIP participation, euphoria in IPOs.
The way it is getting oversubscribed, so that does say that the higher cash levels in those schemes are more chasing few supply, so that is certainly evident.
So, there, our strategy has been that valuations have to be reasonable. We are GARP investors. Our average portfolio price earnings is 15.7 times on 26, with higher ROE and growth than Nifty. So, our strategy is be selective, be stock specific, have a higher margin of safety and do not overpay for growth.
You are a bit cautious when it comes to the cement sector, but do not you think that given the fact that now capex is expected to pick up in the country, demand for cement would also pick up apart from that, pricing has also eased out a bit, raw metal prices are also not at a lifetime high. So, can things turn around for the cement sector going forward?
Sanjay H Parekh: So, we are watching it closely. I mean, we are certainly not looking backwards, otherwise Q2 was very weak, which was seasonally weak always. But Q3 also, there is not enough pricing power and the aggregate utilisation level is still around 70% and there is huge supply, which is already going to kick in and we are able to see that demand is also not as much as which is required for a proper price increase.
So, we are very watchful and we are open about it. But the worry that we have is the pricing power is still not enough. The larger caps is where we are comfortable at a price and there we think that if you take the EBITDA per tonne at least, I mean certainly get 1300-1400.
But even if you take 1000, 1100 as estimates, the larger caps are still not as cheap as you want it to be. So, I think that at a price we will certainly look at the larger cap plays in cement, which are going to be consolidating the whole industry. And the consolidation will take time, it is not going to happen very soon. So, it could be a little prolonged. And hence, we want to buy them at a price.
