Which sector will lead the next market rally? Jyotivardhan Jaipuria answers

Jyotivardhan Jaipuria, Founder & MD, Valentis Advisors, says after the correction, they are getting a little more constructive on the market. He is no longer worried about high valuations of the Indian market because relatively, the valuations are looking okay. Now, we trade at around 65% premium to emerging market PEs, which is more or less in line with global averages and way below what it was six months back. As for earning growth, the March quarter will likely be closer to 8% and next year it may be 11-12%. Once earnings growth picks up, the market will feel relatively better and start moving up.

Jaipuria also says he likes banks, pharma and in the consumption space the three picks are white goods, travel and probably auto ancillaries.

Do you think banks will lead this rally going ahead and that is the sector to be in at this point in time because we have a lot of them saying yes, because the valuations are now reasonable, it is attractive, and banks is where one should be.
Jyotivardhan Jaipuria: We also like banks and unfortunately, we are with the consensus here. The reason we like banks is valuations. If we do 10-year valuations for all sectors, banks are the only sector where valuations currently are below the 10-year valuations. So, to that extent, there is a lot of margin of comfort there because at low valuations, you need fundamentals to improve a bit, and then you can get decent share price performances, so that is why we like the banks.

As we move into the course of the year, there has been NIM pressure. But we have seen that RBI has pumped in a lot of liquidity in the system, and so hopefully deposit growth will pick up because of that and then we will see NIMs starting to stabilise also. So, both valuation being very attractive and business fundamentals can start improving, that gives us room for optimism on the banks.

Let us talk about the Nifty also. We are currently trading at a very comfortable multiple. In fact, we are in line with the 10-year averages and we are below the five-year average as far as the 12-month forward PE is concerned. Is the worst really behind us? Are we out of the woods? Are we bottoming out or are we close to the bottom? Given the dollar weakening, any further depreciation in the dollar going ahead augurs very well for the Indian markets. How do you see that panning out in the next few months?
Jyotivardhan Jaipuria: For us, after the correction, the markets appear reasonable. We are getting a little more constructive on the market. Valuation was something we were worried about. Now, we are not as worried about valuation because we are more or less there. So, it is not just in a very historic India context, but even if we look at it relatively, the valuations are looking okay. Now, we trade at around 65% premium to emerging market PEs, which is more or less in line with global averages and way below what it was six months back.

What has helped is India has corrected, China has done very well, so relative valuations also have become good, which probably helps FIIs outflows to slow down. For everyone, the critical question is growth and whether growth will come back. So, we are watching growth. Our analysis is that the growth will keep getting better sequentially every quarter and that will probably help markets do well. We got 5% growth in the December quarter after two quarters of 3% growth. The March quarter will probably be closer to 8% and next year we are looking at 11-12% earnings growth. Once we start seeing that earnings growth coming, the market will feel relatively better and that is where we can get some moves coming up in the market.

What is your take on defensives in particular? If you talk about pharma, as well as the IT sector, both are export oriented, both are dependent on what is going to happen in the United States and the way things are turning in that particular front. If you have to make your pick in the defensive pack, will it be an IT or will it be a pharma and why?
Jyotivardhan Jaipuria: It is pharma where we are more bullish than IT.

IT is very dependent on growth in the US. So, a lot of numbers now are showing that the growth in the US is slowing down and if these tariffs continue, we could see inflation starting to come up, which means that the Fed may have limited room to cut interest rates, whereas pharma there is a secular growth which is going on. So, for us, pharma is a better way to play it than IT. We like pharma because one is the US generic pricing environment, which was quite bad over the last five years, six years, if you see there was a constant reduction in US generic pricing, that is starting to plateau out and stabilise, it is not going up, but it is at least plateauing, so that has the US generic space.

Second is demand has been quite strong and demand continues to be strong.

Third, we like the CDMO pack in India because with China plus one, we are going to see a very secular growth. Only one overhang is going to come for the pharma companies, because Trump has said that there will be some tariffs coming on pharma from April. And so, if tariffs are very onerous, then there could be some disruption in the market. Otherwise, pharma is the space to be in. We think here there is a secular growth story for the next three years, five years.

What about the metal index because it has completed a fair bit of consolidation and metal prices are picking up and now with the dollar wind waning, do metals and commodities look attractive at this juncture?
Jyotivardhan Jaipuria: Generally, we are very wary; we do not buy metals in a very big way normally because metals are a very Chinese play. The way I look at China is they are not trying to increase the investment side of the economy. Even all the growth which we are looking at in future is going to come from consumption. They are trying to shift their focus from investment to consumption. So, to that extent, there will probably be a slowdown in metal consumption for quite some time over the next, let us say, three years, five years, if we think China will probably consume less metal than it has over the last five years.

So, to that extent, one of the biggest buyers of metal is probably going to see a slowdown. There is one short-term trigger which may help metal prices because India is thinking of imposing some tariffs on steel in India and if that happens, then steel prices in India will go up and that could be a short-term boost for the stock prices. But otherwise, we are not very bullish on metals and we generally do not play that because we think it is too cyclical a cycle which we do not understand too well.

Will you look at the consumption space or the FMCG space as one of the themes for the year?
Jyotivardhan Jaipuria: We have still not participated in the FMCG space. We have been underweight on the FMCG space. Even when that Budget announcement came, our take was that the Budget push probably will help consumption in some way, but it is not really the FMCG part or the consumer staples which are going to get help, but it is going to be more consumer discretionary because the benefit came to people who are earning more than Rs 7 lakh.

Now, most of them have already consumed their soaps and toothpaste and shampoos, so they are not probably going to buy more of that or upgrade in a big way, but are going to buy more discretionary items. For us, FMCG still remains very expensive. At those valuations, we do not think there is too much room to make money. It is a sector which people play when the markets are falling because it somewhere tends to fall a little less than the market because it is under-owned and it has underperformed for quite some time. But otherwise, in general, it is a space which we are underweight on. Within consumers, we prefer to play more consumer discretionary sort of names.

You are definitely more disposed towards the discretionary side of consumption. Where within the pack do you see value? Is it travel and tourism? Is it the auto pack?
Jyotivardhan Jaipuria: There are a couple of names which we own in the white goods space and in the travel space and we also like autos. We mostly play it through auto ancillaries because there are a lot of auto ancillaries which are doing well and probably because they supply to two-three different manufacturers and they keep adding some product or the other, and they tend to grow much faster than what some of these OEMs grow. I would say white goods, travel and probably auto ancillaries would be the three picks for us in the consumption space.