Well, so much to talk about in terms of the market momentum we have seen, you have earnings, you have some stock specific and sector specific action coming in. So, let us begin by talking about what the mood is like in the market right now because we have seen a serious range of consolidation recently. What is your take on the market? Do you believe that the kind of cool off we have seen could make for a good case on a buy on dip strategy sort of a thing or it is just a wait and watch momentum in the market right now?
Manish Sonthalia: We have seen the markets rally one way from March onwards and we have seen the index rally up to 15%. And we are in the middle of the earning season. So, it is the nature of the markets that whenever you are in the earnings period, there is a lot of volatility. And because the markets have moved one way on the upside, there could be some selling that will come about in the earning season. But I would reckon that these are times to basically buy the declines that you are seeing. This is not a market where you are going to sell on the down tick, so that is what I understand. And it is supported by earnings, it is supported by macros, it is supported by global flows, all of that. So, I would believe that the market is a buy on dip.
Give us some sense that which sectors do you believe offer the best risk-reward at this point in time because we have just kickstarted the earning season, a bit of a disappointment coming in from the retail and the IT players. But any sector that you wish to flag off where you believe that the valuation, the growth outlook looks favourable and even the price points?
Manish Sonthalia: Public sector banks, real estate, infrastructure, you will have capital market plays, consumption, discretionary consumption particularly even if the earnings do not come through this quarter, next quarter onwards you surely should be looking at some sort of an uptick in the consumption.
So, these would be some of the plays I would believe would be outperforming the rest of the market this earning season. As far as the IT names are concerned, again it is not out of the ordinary TCS reported the numbers, pretty much in line adjusted for BSNL numbers.
So, all in all, largecap would have minus one to plus one sort of a CC, constant currency, growth but the better numbers would likely be from the mid-tier players in the IT space. Again, on the IT side again, I would believe that most of the negatives are broadly in the price. If we were to take a next two-to-three-year point of view, these are basically buy on dips even for IT names.
Last time we interacted, you were very positive on the entire insurance space, life as well as health insurance. Does that conviction continue?
Manish Sonthalia: Absolutely. I would believe that on a sequential basis the health insurance names would see some sort of an uptick in terms of your profitability, the combined ratio would likely be better than what we have seen in the previous two-three quarters. And long-term trajectory in any case remains okay. And the valuations per se are very-very reasonable. Likewise, for even the life insurance players, even in the first quarter their growth was very-very decent. So again, out here life insurance has not seen too much of an action in terms of over the last two-three years.
While we interact with the other market participants as well, they are always flagging off that concern with respect to the valuations, lower growth earnings, and what will eventually be the case with respect to the tariff. While it is good to note and it is good to hear from you that it is a buy on dips market as per you right now, but do not you think that there are some concerns for the markets of late or are you also pencilling in some of the risk factors or it is all good for the markets right now?
Manish Sonthalia: Markets would have something to worry about at all points in time. We have never seen a market in my 30 years where they do not have anything to worry about, everything is hunky dory. So, having said that, you look at the anecdote as far as the valuations are concerned from the point of view of earnings.
Fourth quarter number earnings was the best for the midcap and the smallcap space and that is where the maximum concern on valuations have been. So, while the Nifty 50 reported 2% YoY growth in the fourth quarter, operating profits were around 5% or 6%. The same number for, let us say, Nifty 50 next was around 27% growth.
For, let us say, Nifty 150 midcap index, the earnings growth for fourth quart was 21%. For the smallcap 250 it was 20%. So, when the whole Nifty 50 is seeing a low single-digit sort of a growth, I mean the better growth numbers are coming in from the broader markets.
Having said that, yes, historically the median valuations of Nifty 150 midcap was around, let us say, 30 times and today the index is valued at around 35 times, you will have to remove the outliers. You have very high allocations in some of the stocks which are trading at more than 100 PE.
So, lopsidedness on some of the allocations, the index gives you a very skewed picture as far as the index PE multiples on the mid and smallcaps are concerned.
But overall earnings trajectory for the mid and smallcaps are going to be much better even for this quarter. While the Nifty 50 earnings growth is likely to be in the range of 3% to 8%, I mean the midcap index projected earnings growth is going to be around 22-23%.
And even for the smallcap index earnings protection is going to be around 10% to 15%. So, it is going to be better than the index per se and frontloaded dose of liquidity and cost of capital will only keep valuation slightly elevated and there is going to be a price inflation according to me because of the RBI actions and that would be supportive of the market as a whole. So, if one was to assume that markets will fall off a cliff, I would not think so. And in any case, markets do not remain in equilibrium, they undershoot or overshoot. This time around because of the earning support as well as the RBI actions, markets are more likely to overshoot rather than undershoot or stay in equilibrium.
Also, give us your sense on some sector specific moves. Pharma is a space that you have liked for some time now, but the big overhang of the 200% tariff on pharma still continues. Does that change your stance on pharma? And do you believe that this 200% tariff could actually materialise on the space?
Manish Sonthalia: No way. I mean, I would believe that first of all, you have a holiday on that tariff for the next one, one-and-a-half years and 200% tariffs in any case is not doable. Even after, let us say one, one-and-a-half years, you will have something coming up on that front. Generics is what supports the pharma industry in the US and if this is the amount of tariff, then obviously if there is a pass through of this 200% tariff, it is going to be extremely adverse for the healthcare sector as a whole for the US.
But sticking with the tariff, everybody is waiting out for that final number with respect to the India-US tariff. But this time seems to be a little different with respect to the market reaction we have seen on April 2nd because from then till now with respect to the other geographies, Donald Trump has not made any big changes in terms to the numbers. Do you believe that if at all for Indian markets if we also come nearby to that 26% odd mark, it will be very well digested by the markets?
Manish Sonthalia: No, I think 26% would be taken very adversely, 10 is already there. Any number between 10 and 15 would be positive for the markets. More than that this 500% tariffs because we import oil from Russia, I mean that is to be given more importance as to whether that is going to come or not come but otherwise markets are digesting today a number between 10% and 15%. If that be a case, then it would be a relief for the markets. Anything more than 15% in the vicinity of 20% or 26% would be negatively looked at by the market.
What are you making of the tariff impact on the entire US macros? We have seen the bond yields that spiked up. The dollar index continues to be under pressure. Do you believe the tariffs are doing more harm than good to the US economy at present before they start playing out for the longer term?
Manish Sonthalia: Absolutely. I mean, there is no doubt that ultimately the tariffs are going to be paid by American consumers give or take a bit here and there, that is about it, and it is going to be quite inflationary. And from the point of view of the fact is the repercussions on the US dollar, I would reckon it is headed on the downside and if that be the case, then it is going to be beneficial for emerging markets, India is a part of the emerging market and it would also tend to benefit from flows.
