Market may decline further but nothing major, hopes Ashi Anand, points to value zones

Ashi Anand, Founder & CEO, IME Capital, says he would understand if there is further downside to the market. However, due to the strong long-term outlook for India, major declines are not expected. The main worry is with smallcap stocks. In larger-cap indices, a drop of 5-10% seems manageable. But with smallcaps, if retail investors start to panic, liquidity can vanish quickly, leading to significant losses. Therefore, he recommends that investors should stay cautious.

Anand also says that for people with a slightly longer-term horizon, some attractive buying opportunities exist in Digital and some could emerge in capital markets and real estate and capital goods spaces. All these companies have run up very considerably. These are also stocks that have led the fall, and have all fallen more than the overall markets.

How much more of a selling are we likely to see or do you think that the end is near now?
Ashi Anand: That is really the question on everyone's mind. We do not necessarily think we are at the absolute bottom. There could potentially be further downsides. Just to understand that in the overall context, markets have doubled from before pre-COVID levels taking the COVID fall. But if you look at the largecap indices, they have doubled from pre-COVID. You are down only 10%. Smallcaps were up 300%, and are down only about 20%.

If you look at the corrections in the context of the major move that you have seen on these broader indices, the correction is really not something which is very sharp. Now, if we look into what are the factors driving this current correction, you got a slowdown in both economic growth and clearly in corporate earnings, we have just completed the corporate earnings season. You have had a low single-digit earnings growth for the Nifty.

You also have a combination of other factors. You have interest rates where the whole interest rate reduction cycle is actually getting delayed. You have uncertainties related to what Trump is doing, especially in terms of trade and tariffs and also a generally weak rupee. Now, in the context of the fact that there are multiple headwinds to the markets, markets have moved up substantially over the last few years and the correction is still something which is not something which is very steep in the context of the larger move.

We would not be surprised if you could see further downsides to the market. The only thing is given the very strong strength of the longer-term India story, we do not believe you would see substantial downsides. We are a bit more concerned about smallcaps, so broadly if you just look at it, in the largercap indices another 5-10% down and that should pretty much be done. But what we are concerned about is smallcaps because in smallcaps if at some point in time the retail investor starts panicking, liquidity can dry up very rapidly and you could see very sharp downsides there. So, it is a market where we would advise investors to remain cautious.

Are there any value zones now, pockets which may have corrected significantly where you think one can start buying into.
Ashi Anand: There clearly are quite a few interesting value zones. I will just give you some of the areas that we are focusing on. Digital is a space we have spoken about multiple times in the past. We really see a lot of value in terms of the longer-term growth potential of listed digital platforms, both in terms of their ability to scale up not just revenues but also increase profitability.

A number of these counters have actually fallen quite significantly. This is something that it is very important that any investor looking at the space needs to take a properly long-term view. We are talking about three to five years plus. But for anyone with that kind of a time horizon, we are seeing a lot of attractive opportunities in digital.

Within BFSI, there are a number of banks ranging from some of the high-quality franchises that have not been performing or certain other banks with high exposures to unsecured or MFI which have corrected very significantly. Some of these do present some quite attractive buying opportunities. So, on that second bucket, in terms of the banks with the MFI unsecured exposure, you probably just want to wait for the dust to settle.

Apart from that, there are certain sectors where there is very, very strong business momentum and a very strong longer-term story. So, these will be companies in capital markets and real estate and capital goods, all of these have run up very considerably. These are also stocks that have led the fall, so they have all fallen more than the overall markets. However, given how sharp the move is, we believe that there could still be some amount of time before these become attractive buying opportunities. But in the context of the longer-term growth, for people with a slightly longer-term horizon, some attractive buying opportunities in these spaces could also emerge.

You were just talking about some spots within the new-age tech space, but what about traditional IT services? How does that look in the time of not just AI, but all that is happening in the US as well?
Ashi Anand: So, IT services definitely does look interesting. You need to bifurcate a bit between a shorter-term and a slightly longer-term outlook. In terms of the shorter-term outlook, there are a number of positives that you are seeing in the space. Firstly, just as in it is one space where the weakness in the rupee clearly does help these companies, so weakness in the rupee is clearly positive for margins, so that is one thing. The second core is really there is a large amount of optimism around how Trump could potentially revive the US economy, now that is something which will clearly help IT companies.

They have all been struggling with weak discretionary demand. We all know these are amongst the highest quality companies in India, not just in terms of corporate governance, but if you look at their financials, you look at the balance sheets, you look at financial ratios, etc, these are very high-quality companies that are still available and fairly attractive valuations.

Growth has been a concern with the US economy potentially turning around and with the rupee weakness, you have support in terms of both revenue and margins. AI is going to be a very-very interesting thing to watch. The way we look at the impact of AI on IT services is in the near term, it is actually likely to be a boost. There will be tremendous productivity benefits that IT service companies would be able to extract through the appropriate use of AI and a number of enterprises will also be looking at adopting generative AI into their business models and they will need IT firms to help them with that particular transition.

It is more from a slightly longer-term perspective as AI becomes that much better at coding that would actually have AI possibly being able to replace a certain amount of your coding talent. Now, while this is technically positive at some level for an IT company because you are reducing resource requirements in terms of number of resources and it is also technically positive for margins, but it could very clearly lead to a deflationary environment over the longer term. So, IT services is a space that clearly looks fairly attractive from a one-to-three-year perspective, but longer term the impact of AI is something that does need to be closely monitored.

Apart from IT, pharma as well because a similar sort of story is playing out. Last week, we saw this entire sector bear the brunt of the talks around US reciprocal tariffs on the pharma space. Do you think the pain is over or the sort of negative news flow around the tariffs may be overdone and it is time to look at the space given that the positives outweigh the negatives?
Ashi Anand: When it comes to pharma and tariffs, there is a general hope in the markets that pharma would actually be spared. And the biggest reason for the same is that there are a very large number of drugs that are still in shortage in the US. A move towards genericization and lower price drugs is a very clear requirement in the US. Putting on tariffs which would increase the cost of drugs is clearly not something that may be a very smart move from a political perspective.

There is some hope that pharma may be spared from very aggressive tariffs. As part of the Biosecure Act, you are trying to shift production away from China towards other economies. So, even if some form of tariffs do come in, we believe that it may be a little more touted in China but a lot of this we really have to sit and watch. This will increase uncertainty in the near term, but the hope is that tariffs in the pharma sector specifically may not be that high.

However, when it comes to pharma, one important thing to just understand is that there has been one very large drug called Revlimid, which has boosted earnings for a very large number of companies. Now, as the revenues from this particular drug plateaus, it creates a fairly high base for companies to grow off.

Therefore, when you are looking at pharma, it is very important to go in stock specific, look at the specific pipeline of new drugs that are going to come in to be able to take care of this high base that Revlimid creates and therefore, we believe that in pharma, there is a potential for certain earnings downgrades in companies that would not have a strong enough near-term pipeline and investors just need to be careful about that element.

What about consumption? I know you do not track it as closely as the IT and the tech pack, but are any of the consumer names looking interesting to you after the recent selloff?
Ashi Anand: We track consumer stocks very closely. We run a tech fund, but we also run a general flexicap fund and consumer is an important weight there. Consumer is basically a segment where you are waiting for the overall growth recovery. The important part is in the current results season, you have seen certain mixed trends, and there have been certain companies that have actually outperformed on overall growth. However, it is not all segments of consumers that are firing.

In the current environment, where you are waiting to see an overall consumer recovery, you need to be quite picky about the specific companies that are being able to grow even in this current environment. We have got investments in Titan, which has consistently been doing very well and they continue to perform in the current quarter. You have seen other packs. We do have Nykaa in our digital portfolio, and that has done fairly well.

We also have Britannia and ITC within the FMCG pack along with Jyothy. So those are the three. All of these are very attractive from a valuation perspective. Both ITC and Jyothy trade at substantial discounts to their peers. Britannia has been holding up quite well in terms of overall growth. They have a very interesting transition towards becoming a packaged foods business, a larger packaged foods business, very interesting initiatives they are taking in the Hindi heartland to actually be able to grow larger in the space.

So, consumption clearly is an attractive space. You just have to be careful about the segments you are going into. We prefer discretionary consumption stocks over non-discretionary or FMCG over the longer term, but that pack is currently a bit weak on growth. As overall urban consumption comes back, we see a lot of interesting names out there.

What within the healthcare space – not just hospitals, but diagnostics as well – is looking interesting to you?
Ashi Anand: Within healthcare, we prefer hospitals to diagnostics. In the recent past, diagnostics is also doing reasonably well. But the reason we prefer hospitals even though it is a much more capital-intensive business is that hospitals tend to have a much stronger competitive moat. One would argue that hospitals are much harder to disrupt. What we are seeing in the diagnostics space is that there are a number of new entrants coming in.

The barriers to entry for someone to enter diagnostics is really not that significant. There have been multiple notes in the past that have really spoken about the very wide price differentials that exist between different diagnostic players. So, while diagnostics is clearly a very strong growth opportunity, there are clear competitive threats and competitive threats have come in and there was very significant pricing pressure a year back which has since reduced. But it is something that we believe could come back.

We also believe that there is clear scope for a smart new-age digital first kind of tech disruption in the diagnostics space and how that will play out in terms of pricing and margins, etc, in diagnostics is something we have been a bit watchful for and this is why it has largely been a space we have stayed away from.

On the other hand, there clearly is under penetration of hospitals in India as affordability improves because of greater insurance availability. Ailments are clearly on the rise. Awareness in terms of treatments are clearly on the rise. We have a fairly interesting growth runway where occupancies and ARPUs can both move up. That said, when you look at hospitals, you really need to be careful about what stage of a capex cycle hospitals are in because whenever they are going through a strong or aggressive capex phase, a new hospital takes about three to five years to actually breakeven and start making money.

In the past we have seen that when there is a very aggressive capex phase, these companies do not really perform very well. So, we prefer hospitals over diagnostics and within hospitals, we prefer companies that are not going through a very aggressive capex in the immediate near term.