Markets have been quite volatile for the last couple of months. There were multiple reasons behind it. It was weak earnings. Valuations were expensive. There were outflows. But how is the market looking like right now at this current juncture. Are earnings expected to pick up from the third quarter? Are valuations now reasonable after the correction? How are you looking into the markets?
Vinay Paharia: So, you need to divide the overall market views from near term and from the medium-to-long-term perspective. If I were to look at markets from a near-term perspective, clearly, there are challenges. We are seeing slowdown in earnings growth. It started off significantly in the second quarter and the third quarter of this year also from the early indications are not looking very-very promising. Also, the valuations, as we all know, the valuations are not very attractive. They are not cheap, especially on the mid and smallcap side. So, the near term appears a little bit challenging.
However, if we look at it from a medium-to-long-term perspective, clearly, India is one of the fastest growing countries in the world. This is getting reflected in corporate profitability growth from a medium-to-long-term perspective.
And from that point of view, if I am an investor with a reasonably long-term investment horizon, India still presents a reasonably attractive opportunity. Of course, there are challenges, there are bubbles or micro bubbles, but overall market looks fine from a medium-to-long-term point of view.
So, are you expecting the second half of this financial year earnings to be also weak given that it is quite contrary view compared to what the other market experts are expecting? They are expecting second half to be much better, given that capital expenditure is expected to pick up. There was festive season and also rural demand is picking up.
Vinay Paharia: So, that is the current hope. We would not want to have hope as a strategy. If we look at the current trends, clearly, the trends are appearing to have softened in the second quarter. We have seen significant downgrades in a lot of earnings. For example, the consumption basket has seen a significant downgrade. Overall consumption has weakened in the second quarter. The third quarter, as I said, from the early indications that what we see, for example, some of the companies have given mid-quarter guidances. The auto numbers are not very healthy. So, net-net, we are not seeing very significant signs of any pickup in economic activity. And hence, we cannot pin our hopes on a hope of pickup in the second half and hence, we will be monitoring incoming data. But at this point of time, from whatever data and commentary which we are receiving, we are seeing some bit of softening in the overall corporate earnings growth in the fiscal year 2025.
But then what is the strategy that you are following with respect to the sector calls because since you are saying earnings are expected to be weak, which are the sectors you think that have likely priced this in and hence provide a reasonable risk-reward opportunity?
Vinay Paharia: So, we have observed a very big divergence in the market in the last one year. Specifically, if we were to look at a very long period history, right from two decades back till about last year, we saw companies which were high-quality businesses and high-growth businesses, these had delivered significantly superior return compared to the overall market. However, in the previous year, we saw all of these companies significantly underperforming.
And hence, the valuations of these high-growth and high-quality companies are still reasonable and that is an area where we are significantly concentrated in. We think there are opportunities in the high-growth, high-quality basket and that is a place where we think which will potentially deliver significant outperformance in the near to medium term as well.
So, which are those high-growth, high-quality areas? I mean, are you finding these opportunities in, let us say, the banking sector? Are you finding this opportunity in pharma? Which exact sectors are you finding these high-growth, high-quality opportunities?
Vinay Paharia: So, generally, these are scattered across different sectors. But there are certain sectors, clearly, where the concentration of these companies is higher. For example, clearly, healthcare is a sector where we see abundance of such companies which are growing at a fast pace, which are having a very high-quality business. There are private sector banks, which we find very attractive, so financials. There are a lot of IT and product companies which we find very attractive. So, these are generally the sectors where we think there are lots of attractive businesses. Of course, telecom is another sector where we find the presence of high-growth, high-quality businesses. So, generally, these are areas where we are concentrated in, we are overweight in our funds, and we think there is good opportunity in these sectors in the near to medium term as well.
