Market recovery driven by easing macros and FII inflows, but valuations remain expensive: Christy Mathai
"If you were to look at the earnings trajectory, again first half was pretty bad you have seen sizable earnings cut especially if you were to look at the FY26-27 earnings. But then, this
earning
season is probably a bit mixed. There are some pockets which have done well, some which has not," says
Christy Mathai
, Fund Manager-Equity, Quantum AMC.
What a move in the markets of late though the news flow was quite volatile. We have been hearing from President
Trump
. The earning season is in full swing and then, we had the tensions border across. But there is always saying that good price and good news does not come along. Now that we are seeing that the prices are quite looking good, the bulls are seen to be back, especially with their interest in the largecap space and the news is also turning out to be the good, help us understand what is your take on the markets, is the price still good to go ahead and chip in some money?
Christy Mathai:
So, clearly, as you said the markets have just recovered quite sharply if you were to look at it and possibly some of the easing that we have seen on the macros, especially global macros for that matter, some of the geopolitical tensions easing would have contributed to that and we have seen a fair bit of inflows from the FIIs also, so which has kind of propelled the market to where it is. But see, I would look at from two-three lens.
One, of course, if you were to just look at the plain macros, yes, things are improving after sort of not a weak first half FY25, things are just gradually inching up though the GDP estimates has been cut, possibly some bit of easing is happening especially if you look at the RBI actions, there is lot of liquidity infusion, if you were to look at the inflation, things have just kind of come down, that is on the macros.
If you were to look at the earnings trajectory, again first half was pretty bad you have seen sizable earnings cut especially if you were to look at the FY26-27 earnings. But then, this earning season is probably a bit mixed. There are some pockets which have done well, some which has not.
Our sense is the ask rate in terms of earnings is around 11, 11.5 which is not so demanding. So, the earnings cut further on may not be so steep, perhaps it would have bottomed out in that sense. But the mood point is the
valuations
.
The valuations remain expensive across most of the buckets and that is true more also in the broader end, but if you were to just look out
Nifty 50
or BSE 30, the valuations at Nifty at 21.5 is expensive.
Live Events
So, if you were to just put it all together, yes, we are more constructive with the markets, from the levels six to eight months back, but investors have to possibly be looking at moderate returns, especially in the context of what we have seen three- to five-year returns.
Now, the kind of recovery that we have seen in the past few days and also the earnings trajectory, just like you were mentioning, are there any particular pockets where you see value in currently and are there any spaces that one must avoid at this point in time?
Christy Mathai:
Yes, clearly, so as I said, the headline numbers especially on the valuations may look expensive, but there are, of course, pockets of opportunities that you continue to see.
There was initial period of correction that we have had. So, we have broadly added into some of the pockets where the earnings growth was a bit weaker, especially in the IT because there valuations had become, especially if you were to look at FCF yield and so on and so forth, things were looking a bit better.
Also, if you were to look at the whole pharma bucket, there has been lot of news flow around it, again we have used that opportunity to add into some of these names. Same as with the financials.
If you look at some of the general insurers, health insurers in the past few quarters, they have not gone anywhere in that sense because there could be one headwind or the other, but broadly if you were to just look at the whole pack, it looks a very fairly underpenetrated segment for country as a whole and long-term growth is not at all at risk.
So, not participating in the rally for the past few months or years, we have kind of added into some of these pockets. Pockets we avoid, again, we are a value focused fund, so anything very expensive would be an avoid for us, especially the likes of what we are seeing in the whole cap good space, the defence where things are looking very expensive, although the near-term growth looks positive is what we would typically avoid because of our value focus.
Since you said that you have added to some of the pharma counters, of late. Within the earning season, what we are seeing is that the generic companies are highlighting that they are immune to the Trump's executive order. While the CDMO companies with respect to the growth that is a long pending one and the long-term growth outlook is quite robust and then there is API where still that China plus one theme still goes on. Give us some sense within the pharma pack where are you finding opportunities.
Christy Mathai:
So, mostly our addition is in the generic space, especially the US focused generic, although they have sizable India-centric business as well. See, the point is the executive Trump order pertains to possibly the very high value products, especially coming from innovators or possibly from other developed countries. So, maybe India you would have some exposure, but not much.
If some of those pricing are coming down, would there be an impact on generics? We do not really think, but we would have to get into finer nitty-gritties which is not very known at the moment.
So, we have by and large found opportunities within the generic space where the valuations were coming down and the past two-three years earnings for a lot of these companies have been driven by fairly benign US pricing environment.
It is cyclical to some extent, but the pricing environment in a sense may continue for some time like that, so which would be an impetus and some high value molecules or drugs which have come into the market, some of them are going off, but the point is there is enough and more which the Indian pharma companies through their Para IV filing or first to file there could be an opportunity to replace.
So, by and large, we remain constructive on the sector. Again, you have to be very stock specific, so some of them would be trading very expensive, but some of them given the near-term issues might be trading cheap is where we find an opportunity.
Just a little while ago you mentioned that cap goods and defence still look a little bit expensive to you. Can I also get your view on the power space. We have been watching out for the earnings, and it has been a mixed set, but the outlook there is very strong across companies. So, what is your take on that space and any names you could help us pick and avoid?
Christy Mathai:
So, if you were to look at the power sector, again some of these companies have done phenomenally well. We used to own quite a few of them, especially the utility bucket, but we sold out given what we have seen in terms of the rally in the recent past.
See, the power sector growth has clearly been ahead of the long-term GDP growth that we have seen and some of them is trickling into whoever lies up ahead in the value chain and there will be more value creation in that bucket as opposed to just the power companies. But again, here the concerns is if you were just to look at the utility space where you get a regulated equity returns, some of these companies are not really priced for that regulated equity returns, which would be in the vicinity of 15-16% give or take.
On the other sub-segment where, let us say, you are playing in the value chain within the power sector, again here things are much and beyond because you are looking at maybe two-three years of great earnings or revenue order book growth, but what will happen post that, that is the key concern.
Are you able to generate a secular 18-20% sort of return on equity, that seems to be the concerns especially considering the valuations that we see. So, as I said, we used to own some of these names, but we have kind of sold out in the ensuing rally. Currently, it looks unfavourable in our view.
You have told us what is looking actually good to you, but tell us which is the area which is not looking that attractive to you at this point in time.
Christy Mathai:
If you look at the whole financial space where things have been market linked, could be broking houses, some of the AMCs where the valuations have run up.
So, these are the pockets where one has to realise things are a bit cyclical because, for example, if you take a broking house or AMC or anything within that value chain, what you see is, it is linked to the market and there is cyclicality in that.
But again our concern here in some of these pockets is, is that cyclicality rightly captured? For example, if you look at a typical AMC, there will be addition in terms of what will be the fresh flows, but there is also an M2M component which kind of helps every year. So, are we baking in great M2M for the next two years? We think not.
Chances are there could be correction in that theme. So, all these entities which are market linked to some extent, there could be some bit of correction. In the near term, they are doing well because we have seen a rebound. But we have to think about the next one-year, two-year, three-year what can happen. We would see some drawdowns in some of these pockets, that is our expectation.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Time of India
an hour ago
- Time of India
Why Harvard is now willing to negotiate with Trump after months of legal and financial warfare
Why Harvard is negotiating with Trump after months of US legal and funding clashes After months of fierce legal battles and deep financial strain, Harvard University has reopened negotiations with the Trump administration, signaling a potential turning point in one of the most high-profile confrontations between a US president and an academic institution. The renewed talks mark a sharp departure from Harvard's earlier posture, when it publicly resisted what it described as overreach and political interference by the federal government. The discussions resumed during a recent meeting at the White House, where Harvard representatives presented a PowerPoint outlining steps the university has taken to address concerns around antisemitism, viewpoint diversity, and admissions practices. In return, the White House issued a letter proposing specific actions Harvard must undertake for a resolution, as reported by the New York Times. Though the university has yet to respond formally, sources cited by the New York Times described the White House's tone as serious and the talks as active. A shift driven by mounting financial and legal pressure Harvard's decision to return to the negotiating table appears to be motivated by the growing toll of its standoff with the administration. The Trump government has already stripped billions in federal research funding from the university and launched a series of legal actions, including efforts to bar international students, who make up about a quarter of Harvard's student body. It also initiated an investigation under the False Claims Act and threatened the school's tax-exempt status, as detailed by the New York Times. Harvard officials, while publicly defiant, have been privately reassessing the university's future under continued federal pressure. According to the New York Times, university leaders now believe that prolonged conflict could make Harvard "far smaller and less ambitious." Despite having a $53 billion endowment, much of that capital is restricted, making the institution more financially vulnerable than it appears. Talks follow broader discontent and political signaling The university reportedly sought to reengage after Secretary of Education Linda McMahon raised the prospect of negotiations and after other university leaders encouraged Harvard to represent academia in dialogue with Washington. The Trump administration, according to the New York Times, hopes that a deal with Harvard could become a model for similar arrangements with other elite institutions. While the White House has targeted other universities, the fight with Harvard has been the most contentious. At one point, the administration demanded sweeping changes, including merit-based hiring and admissions, curbs on faculty influence, external reviews of diversity-related departments, and reporting obligations through 2028. Trump signals optimism while scrutiny looms President Trump hinted at an impending breakthrough on Truth Social, calling the prospective deal "mindbogglingly historic," and adding it would be "very good for our Country," as quoted by the New York Times. However, sources cautioned that a deal remains unlikely within the next week. As talks progress, both sides face scrutiny. Students, faculty, and alumni are expected to examine any agreement closely. "It would be a tragedy if Harvard resolved this in a way that gave support and encouragement to the idea of extralegal extortion," said former Harvard president Lawrence H. Summers, as quoted by the New York Times . Is your child ready for the careers of tomorrow? Enroll now and take advantage of our early bird offer! Spaces are limited.
Economic Times
an hour ago
- Economic Times
Tata Capital IPO coming next month? Sebi clears road for Rs 17,200 crore issue
Tata Capital is nearing its Rs 17,200 crore IPO after securing SEBI's approval for its confidential draft prospectus, potentially launching in July. This move aligns with the RBI's mandate for large NBFCs to list by September 2025. The company reported strong financial results, with a 31% increase in net profit for the March quarter. Tired of too many ads? Remove Ads RBI mandate looms over timeline Tired of too many ads? Remove Ads Strong financial footing Tata Capital is closing in on a blockbuster Rs 17,200 crore IPO, after receiving regulatory clearance for its confidential draft prospectus, setting the wheels in motion for a potential July launch and meeting a key Reserve Bank of India listing deadline for large non-bank Securities and Exchange Board of India (Sebi) has approved the non-banking finance company's draft offer documents, The Economic Times reported, citing people familiar with the matter. The Tata Sons subsidiary is now expected to file its red herring prospectus (RHP) early next month, a procedural step that precedes the share sale. An email sent to Tata Capital seeking comment remained unanswered until Friday press Capital filed its confidential draft red herring prospectus (DRHP) on April 5. Following Sebi's approval, the updated draft must be published publicly on the regulator's website before the company can proceed with the RHP. The IPO is expected to include both a fresh issue of shares and an offer for sale by Tata Sons, which holds a 93% stake in the RBI norms, Tata Capital and Tata Sons are categorised as 'upper-layer NBFCs'- a classification that requires listing within three years and adherence to stricter compliance standards. In January, the RBI identified 15 such systemically important NBFCs for FY25, including Tata Capital, with a September 2025 listing deadline in NBFCs are selected based on asset size, interconnectedness and other regulatory criteria and are subject to more rigorous Capital has reported robust earnings ahead of the planned IPO. For the March quarter, consolidated net profit rose 31% year-on-year to Rs 1,000 crore, while revenue surged nearly 50% to Rs 7,478 crore. For FY25, the company posted a net profit of Rs 3,655 crore compared with Rs 3,327 crore in the previous year. Annual revenue rose to Rs 28,313 crore from Rs 18,175 company's unlisted shares have gained 13.5% in the past six months and are trading at around Rs 1,050 apiece, implying a valuation of nearly Rs 3.8 lakh crore.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
Mint
an hour ago
- Mint
Everyone thinks the S&P 500 is too expensive. Maybe it's too cheap.
People are growing afraid of buying into the S&P 500, which appears expensive right now. A deeper look at the index shows that it could be undervalued. The fears are understandable. The index has soared, regardless of considerable economic and policy risks. The S&P 500, now a bit below 6000, is well above its level just before April 2, when President Donald Trump announced 10% tariffs on all imports, plus higher levies on many of the U.S.'s most important trading partners. Tariffs are still a danger, even though the president has suspended most of the country-specific levies until July 9. Investors are monitoring whether potential price increases from companies will bring more inflation, higher interest rates, and slowing economic growth. The Trump administration's tax and spending bill, as approved by the House of Representatives, would mean an even larger federal budget deficit, which could both add to inflation and send bond yields higher. Those concerns, for now, are on the back burner. Inflation has remained close enough to the Federal Reserve's 2% target for the market to bet that the central bank may cut interest rates this year, fueling expectations that the economy and corporate earnings will continue to grow. As a result, traders and investors have bid the S&P 500 upwards, leaving naysayers in the dust. Now, the index appears expensive at about 22 times the aggregate per-share earnings that analysts forecast for the coming 12 months, according to FactSet. That is close to the highest multiple in the past 3½ years, a period when rates have risen and growth has slowed a bit. As a result, the view that the market is vulnerable to sliding in response to any economic disappointment has become more widespread. But the most fundamental analysis of companies indicates that as long as the economy avoids major trouble, the S&P 500 is mildly undervalued. Dennis DeBusschere, veteran strategist and founder of 22V Research, did the work. He assumes S&P 500 earnings will grow at 8% annually for the next five years, a standard forecast period for valuing stocks. That call looks reasonable, or even conservative, because it is three percentage points below the consensus call among analysts tracked by FactSet. That type of growth is nothing investors can't imagine. The economy is still expanding, and profits for Big Tech, which account for a double-digit percentage of earnings for the index, are expected to grow just over 15% annually for the next two years, partly as a result of increasing demand for artificial intelligence. For the long term, beyond the next five years, he assumes a constant growth rate of 4%, which means earnings would increase slightly faster than growth in gross domestic product, at 2.8% in 2024. That too is reasonable, given Big Tech's presence in the index. The cash companies return to shareholders via dividends and stock repurchases should grow at roughly the same pace, assuming companies maintain the percentage of their earnings they pay out to stockholders. DeBusschere discounts the current value of those future cash flows by about 8%—four percentage points more than the roughly 4% yield he expects on safe 10-year Treasury debt—arriving at a value of 6170 for the S&P 500. If it traded at that level now, it would be valued at 23 times the next 12 months' earnings. At a glance, that looks too expensive, but it makes sense. Maybe the market really is worth that much. Big Tech's AI adventure is just beginning, and if the economy avoids recession, earnings will grow at companies in other sectors, too. That is a big 'if," and the pessimists are afraid that earnings will disappoint. But if they don't, the S&P 500 isn't actually that expensive. It might even be underpriced. Write to Jacob Sonenshine at
