Macros in India look good enough to take a relative call on flows, but not to justify Nifty at these levels, saysRahul Arora, CEO of Nirmal Bang Equities. Arora tellsMeghna Sinhathat the index valuation is at premium and the current rally is more of a technical breakout.
As the markets are reaching fresh highs, how does the overall valuation of the index look like?
There has been a significant foreign fund flow in Indian market in the last few months. Do you see the foreign fund flow sustaining?
It is quite surprising to see the magnitude of fund flow into the Indian markets. This can be attributed to India’s macro-economic condition, where the inflation has cooled off, CPI is just over 4% and GDP numbers are strong. These are some triggers which have led to global capital allocation away from markets like China and (to) India. Macros in India definitely look good enough to take a relative call on flows, but not good enough to justify Nifty at 20,000.
Markets have sustained the rally when the interest rates are high. How do you think they will perform when there are rate cuts?
The US Fed chairman hinted that interest rate may peak out in near term. Even if the rate hikes are paused, there won’t be cuts for a year. This is likely to tie RBI’s hand as it will not allow an interest rate differential to open up in a very material way. The slowdown will probably come towards the end of the year or in 2024. Any positive impact of a rate cut will be felt towards the end of 2024 or in 2025.
Banking and financial sector is highly price sensitive to rate cuts. What is your stance on the sector?
Banking sector is operating at peak NIMS, peak credit growth, asset quality, return on assets as well as equity. It is as good as it gets for the sector. Therefore, now even an upside of 10% is highly doubtful in the banking index. But if there’s a slowdown in the global economy, asset quality can become a concern. This will have an impact on bank’s RoA and RoE. Credit growth and net interest margin may decline a bit. Though I am not very bullish on the sector, if I must buy then there’s relative valuation comfort in PSU banks as compare to the private ones.
There is rising interest among the retailors in the primary market. What do you think is generating the interest?
It is the dearth of fresh ideas that is generating interest. Most of the ideas in the market are already discovered. If the company has decent market share, respectable growth and is able to provide 15-20% returns on listing, people are buying it. Some of them have merit but not all issues are getting good subscription.
What’s your take on new-age companies like Zomato, Paytm as they are up significantly from their March lows?
Investors have enough opportunities to invest in companies which are profit-making and have respectable market share. People don’t have the patience to invest in companies which are making losses and raising money to fund their losses. These stocks can do well only if they show some road to profitability or cash flow. Otherwise, they will best remain trading bets.
Which sectors do you see performing well in the second half of the year?
We are broadly overweight on pharma, cement and quick service restaurants and selectively on consumer staples.
What is your take on dollar-rupee equation?
The stabilisation of crude between $70 and $80 has been a significant factor for the currency. Foreign reserves and current account scenario are also fairly comforting. Given the macro scenarios, I don’t think rupee is going to see any significant depreciation.