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For next 2 years, earnings cumulatively may go up 50% compared to March ‘21: Sunil Singhania

“We should not be looking at making 30-40-50% every year from equity markets. I think in a scenario where you are making 3-4% net of tax from your fixed income, anything which is double digit returns in equity markets should be excellent returns as we move forward,” says Sunil Singhania, Founder, Abakkus Asset Manager LLP.

At 60,000, how should an investor approach this market? Are the best gains behind us or are we in for a structural bull market? How different will 2021 be from 2020 and which are the pockets for identifying value? You love to follow the 15-15-15 formula, which is buy 15% growth, 15% return but at a PE of 15.
Many times, we have seen that the market has a mind of its own. We have come out of a period where things were looking down and out. From there, in fact, things have turned out much better than what all of us had expected. In fact, as we speak, there is so much optimism, not only in a few sectors which we used to see three, four, five years back but across the spectrum of the country. And on top of it obviously the liquidity has also helped.

I think we are heading into a period where growth looks surprising. We have near-term headwinds coming in terms of rising input costs but the demand scenario is so good that we are able to pass on a lot of these increases. On top of it, a little bit of retail interest which has reignited and that also is leading to pockets of over valuation as far as the markets are concerned. So we are heading for a good and interesting time. These 50,000, 60,000 are obviously big milestones but just because the market is at a particular milestone, we should not get bearish or bullish. At least, I do not subscribe to that notion.

What are the chances that we could be in for a bull market like never before? Normally, a bull and a bear market cycle last for three to four years. But what are the chances that we could be in for a 10-12 year bull market like in the US?
We should not get swayed by data points. A market at 60,000 is a warning signal. People are trying to find mandi in this market and I think the biggest strength of this market has been the frequent but small corrections. Every month, we have this 4-5% correction. Every month we have some or the other things which sort of make us conscious whether it is taper tantrums, the China issues like Evergrande and so on. That is making the market very healthy. We are still in a scenario where most investors are looking for a correction to enter the market rather than looking at an upside to exit the market. That also makes this market very healthy.

On top of it, there are a lot of tailwinds from fundamentals, tailwinds from never before initiatives from the government. Hopefully we are going to see airline privatisation and more are on the anvil. We are finally seeing private capex coming back, largely led by demand coming in across the sectors and for a change our exports are also looking to be quite healthy. Yes there are near-term speed breakers in the sense of logistics issues and spiking energy costs. Raw material costs are rising. There is a lot of volatility. It is easy to be invested but it is very difficult to be entrepreneur or a manufacturer because of the varied variables they have to manage.

But all said and done, we are in a decent situation. Whether this lasts for three years, five years, ten years we do not know. Will there be corrections? Definitely, there will be corrections but I would say that India has been in a decent phase for the last 20 years despite all the ups and downs. The last 20 years returns have been phenomenal.

We are already in a good scenario and there is reason to believe that the next 5-10 years are also going to be quite interesting and beneficial for investors.

Markets are ultimately nothing else but a reflection of economic growth and they try to adjust where the economic growth will be higher and lower and where the profit pools are increasing and decreasing. What are those profit pools you are excited about?
In a growing economy, financials are a big segment. Even in India, it is almost 35% of our economy. And we had a scenario where for the last four-five years for varied reasons, there were lots of provisioning which used to happen particularly in financials which were focussed towards the non-retail side. That provisioning is reducing and on top of it, there is a scenario of excess or adequate liquidity and whereby your cost of deposits are coming down.

We have a scenario where we are able to pass on that benefit by way of lower advance interest rates and that is getting reflected. Mortgage rates can be afforded at 7% and below and so demand is also coming in. The profit pool coming in from the financials will be very significant over the next two years. Same would be the case with so called forgotten sectors whether it is metals or capital goods or even from utilities and power sector.

However, the good thing about India is that we are very diversified. We have a presence across sectors and almost all the sectors are looking like they are in a good spot. We will have the old favourites like IT and pharma chugging along. Chemicals — not on the specialty side but on the bulk commodity chemical side — which was expected to do very well and then economy related sectors like cement, steel, capital goods will also contribute.

“For the next two years, there is a possibility of earnings cumulatively going up by 50% compared to where we were in March ‘21 as the market as a whole.”

If you expect earnings to go up by 50% from here, on an aggregate basis, how much of the earnings uptick is already in the price? Markets always move on tomorrow’s headline?
Investors have not always believed those headlines. There was always a question mark because of what we went through over the last five years. So everyone at the back of the mind thought that this is possible but this might not happen. As a result of which, instead of the investor investing at every rise, we have seen money being taken off the table by and large.

However, having said that, we are not cheap. According to our calculations, we maybe somewhere in the region of 20-21 times FY23 but at the same time there is a lot of disparity in the markets. On one hand, there are stocks which trade at 100 PE multiple and on the other hand, there are stocks where the growth is trading at reasonable valuations compared to their long-term averages. That is where we are focussing on.

The other thing is it is possible that earnings might strengthen as we move forward. We are already seeing a significant change in the world or global dynamics. China is the villain of the world. There is a little bit of a move away from China. Some of the sectors from India — whether it is metals or textiles or even engineering — are benefitting because of that. We are also finally seeing a scenario where Make in India is becoming a reality — whether it is because of PLI or added import duties or increasing demand. India’s manufacturing finally is also seeing signs of coming back to life.

The entrepreneur spirit that had ebbed between 2015 and 2020 is also showing signs of coming back to life. Across the board, entrepreneurs are looking at expansion, there is a lot of money available both from the fixed income side as well as risk capital in the form of equity. The private equity scene is thriving in India.

We already have 31 unicorns as we speak, more on the anvil. All that leads to capital formation as far as the domestic economy is concerned. Interest rates are low that is rekindling demand for housing, automobiles and there is a multiplier effect because of that. The job scenario is pretty exciting. All these things can surprise us as we move forward.

The only one thing I would like to add is we should not be looking at making 30-40-50% every year from equity markets. I think in a scenario where you are making 3-4% net of tax from your fixed income, anything which is double digit returns in equity markets should be excellent returns as we move forward.

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