Indian markets poised for earnings revival, midcaps and select sectors offer opportunities: Rakesh Vyas

As Indian equity markets continue to grapple with the aftermath of a challenging year, investors are seeking clarity on when portfolios might see a recovery. ET Now spoke with Rakesh Vyas from Quest Investment Managers who shared his outlook for the next 12 months, highlighting potential opportunities across market segments and sectors.

Market Outlook: Signs of Recovery
Rakesh Vyas said that last 15 months actually has been far more challenging than what we have seen in last four-five years. But a large part of it is also to be blamed upon the very moderate kind of earnings growth that we saw in the market and as valuations were reasonably fair to expensive in that context and deceleration in the earning growth is what led to the massive underperformance that you see compared to the other global indices.


"But as I see from here on, I mean lot of the impetus being given by both the RBI and central government is trying to boost the consumption and that is what seems to be picking up now. So, if you look at even the credit growth data that RBI releases fortnightly, the last release does indicate that we have seen almost close to 14% credit growth, which does suggest that the consumption seems to be coming back on track and in that context if you look at over next four to five quarters, there is very strong chance that the corporate earnings will revive back to its normalised numbers between 12% to 14% and that being the case, then market return should also follow that trend.”

Opportunities in Midcaps and Smallcaps
When asked about the preference between largecap and smaller companies, Vyas said, “Yes, if you look at from next four to six quarter perspective, I still think lot of opportunity starting to emerge in mid and smallcap names. Some of the smallcaps were also impacted largely because earnings have been disappointing for them compared to what the expectations were. But as we move now going forward on a reasonably more muted expectations, there is very strong likelihood that we will see reasonable outperformance in earnings from small and midcap and that is an area of pocket where we should start to look more deeper into. However, I just caution as well that I do not expect there should be any massive rerating of this space because multiples are already fairly reasonable, therefore the overall expectation of return should be commensurate with the earnings that we see from that space.”

Sector Picks: BFSI, Consumer Discretionary, Power
On sectoral positioning, Vyas highlighted BFSI, consumer discretionary, and power: “Yes, great question. If you look at our portfolio positioning today, we are fairly more tilted treated towards BFSI as a space, of which incrementally we have started to take reasonably meaningful position in the small and midcap private bank space or NBFCs in general. And capital market as a play continues to remain fairly strong given that last 12-15 months have been far more challenging in terms of market return, even then you continue to see very strong inflows coming in for mutual funds. And as we start to expect a normalised kind of return profile from here on, the MTM gain and the continued inflows will continue to support capital market plays. So, within BFSI, these two are plays where we are fairly more positive.

Over last four to six quarters, we have also been fairly positive on the consumer discretionary space, that is one of the bet that we have especially given as I highlighted the RBI and central government interventions that happened with a focus on reviving consumption and most probably consumer discretionary as a space will continue to do well. So, our bets are there off in that space as well with some of the platform companies also taking large share of our portfolio construct. So, we remain fairly positive on autos, hospitality, real estate, and platform companies that I highlighted.

The last thing that I would probably talk about is also the power T&D space because that is a space where we believe that not just in India but globally there is going to be a massive investment that will come through over next four to five years and there are various plays both within the EPC construct as well as the equipment supplier where we have reasonably good position on. So, these are the three larger theme that I will probably highlight too. And the last one where we are more, I would probably say selective but starting to become far more benign about is basically the manufacturing space because as the demand continues to improve, the utilisation levels of most industries will increase thereof, which has been a trend that was missing for last three-four years and in that context then you will probably see private capex coming through, at least the announcement will start in next 12 month or so.”

Power Transmission Focus
Vyas emphasized the transmission segment within the power sector: “So our exposure largely is more towards the transmission space if I could classify it like that, both in terms of the equipment suppliers especially around the HVDC and the high voltage transmission equipment suppliers as well as some of the EPC players who will probably continue to play a major role in strengthening the grid largely and our exposures to companies like Kalpataru and Techno Electric, Hitachi Energy has been towards that and we continue to remain far more positive in that space because as the renewable continues to gain traction, we will need strengthening in the grid system and that is a phenomena that not just exist in India but globally as well.”

Export-Oriented Sectors
On trade opportunities, he added: “You are right. I mean, Europe FTA is probably a very strong tailwind that will come through to many-many sectors including the ones that you highlighted around textiles. But I would also nuance with the fact that the benefit of it will actually take some time for it to start accruing because there is still lot of supply chain, approval process that goes through and then companies will also have to do meaningful capex to gain traction around that. But we also have to be kept in mind the US-India trade deal because if that continues to get delayed, then there is still incremental capacity that is available with the textile manufacturers to move from US shipments to Europe, but largely if we have a deal with US pretty soon, then lot of export-oriented sectors will actually see a meaningful run up because incrementally there seems to be more pressure on margins as well as sales velocity for those sectors.

Coming to IT, I think that is one space where we have been slightly unconstructive on for last almost 18 months or so and valuations have also corrected meaningfully now. It has come to a level where at least the free cash flow and the dividend yields now provide reasonable support. But I would start to become more constructive on names where there is still strong visibility of growth and the valuation that you are paying is still reasonable and not very expensive as I said in many cases valuations have corrected as well. But in the larger IT space so to say, the corporate earnings growth will probably lag the market earnings and therefore I might be slightly more cautious there, but we will continue to look at opportunity in mid and small.”