ETMarkets Smart Talk: As things come together, 2020-2050 will be the golden era for India, says Ambit’s Sushant Bhansali

We have seen some recovery in the market even though most of the negatives such as war, inflation, high crude oil prices are still there. So what is the market factoring at this point?
Since the Covid pandemic started, we have had two great years of equities. This, in our view, is a consolidation phase where the market seemingly peaked out in October 2021 and has been going up and down since then.

To sum it up, the liquidity in the domestic markets from retail investors – whether through mutual funds or direct investments or even the HNIs – is not letting the market go down beyond a point. All the things which you listed like inflation and geopolitical reasons like the war, are not letting the earnings get delivered and which is probably blocking the upside of the market. So markets are in a range-bound scenario for the last six odd months and we expect this to continue for a few more months.

In fact, we are now in the sixth month of the year. The first five months have been nothing short of a rollercoaster ride for investors. What is your take on the markets in the short to medium term as well?
We expect the consolidation phase to continue for a few more months till we get more clarity on whether inflation subsides in the next three to four months or there is stability on the geopolitical front and an end to the war.

It has been almost four months since the war started. Every month, we talk about how the war is likely to be over soon but it has been going on since February, March. Hopefully, in the next two-three months, we will get some clarity on when it will finally be over.

Smart Talk: India’s growth story looks great; IT, Auto and BFSI sectors look attractive says Sushant Bhansali

“If things get better, the market can make new highs and shift from the consolidation phase. We are bullish on IT, auto and BFSI sectors,” says Sushant Bhansali, CEO, Ambit Asset Management

The impact of the war on the crude price is one number which we all are worried about and which has taken a toll on everything globally. It has caused inflation and hurt margins of almost all industries. If things are in control and the situation improves in the next two-three months, then probably we will see the market moving from the consolidation phase to new highs.

The March quarter earning was relatively stable for India Inc. Do you see some disruptions such as earnings downgrades in the forthcoming quarter as you are seeing some supply shocks as well in the near term?
Sitting today when one starts looking at estimates of how growth in 2025 is looking, we all are really bullish. But 2010 to 2020 was a decade in which almost every year, we had great expectations of earning delivery from the Nifty companies. However, the actual delivery of earnings was probably 5-25% less than what it was initially expected.

Only in 2021 when we started with a low base, did Nifty deliver much higher than what it was initially expected. So hopefully the trend is changing. The way we are looking at things for FY23 and FY24, so far it is a repeat of what happened between 2010 and 2020. But if these global headwinds on inflation as well as are out, then probably we will continue with the 2021 earning surprise.

In the last one or two quarters, things are probably stable because these were already priced in but otherwise if one looks at how FY22 earnings have been delivered as compared to their initial expectations, they definitely have been a bit less than what was expected initially.

Where do you see value in this market? Which sectors have entered a buy zone after this recent fall?
Sectors which have corrected the most always give the best opportunity to go back, especially if there is no fundamental change in the earnings. The biggest is the IT sector which has taken a big toll in the last few months after a great rally in 2021.

The fundamentals of the IT business are not changing. The earnings growth as well as the quality of earnings and primarily the business itself and the digitisation thesis that is working out for all these IT companies are here to stay. It is not just a one or two-year story. It is the story of a decade. In today’s world, IT digitisation is something no business can live without. It is no more a luxury which it was before Covid and now is a necessity.

The fundamentals of the industry are really strong. Probably it was the lack of employees on the supply side which was a big issue. They did not do much hiring in the last two to three years of the previous decade and that is why they were short of employees and it led to massive attrition in that industry. That should be under control now and we should see IT make a comeback. That remains the preferred sector in our view.

The second sector which has not participated in this whole rally in the last two years is BFSI. BFSI has been a bellwether of Indian equities for the last two decades and that has not participated meaningfully at all in the rally in the last two years.

I would say BFSI will probably now participate. That sector is in a good shape and issues in terms of credit growth or asset quality are all behind us. Fundamentally, the economy is doing quite well and the latest reports from RBI on credit growth are showcasing a mid double digit growth. If that is sustained, then BFSI probably will be another preferred sector.

The third sector which also has not participated before the rally was autos. It has not participated since 2019. So after three bad years, there has to be a mean reversal and that will be the third sector in which I think we should see good traction in the next six to 12 months.

So IT, BFSI, as well as autos are the three sectors on your radar which at this point in time are providing value. One of the pain points for the Indian market is how the foreign institutional investors (FIIs) continue to offload stocks in the Indian market. Why are they exiting the Indian market? Is it profitability or is it just regular churn in FII portfolio?
FIIs are quite a meaningful segment of the market in the Indian context. It is almost 20%, give or take 1% or 2%. A large part of these holdings are long only focussed funds – be it global pension funds, endowment funds, or probably emerging market India focussed funds.

In addition to that, there are the large hedge funds. Hedge funds will always be coming and going depending on where the opportunities are or where they have made profits and want to book it. In both FY22 and FY21 overall, we have seen outflows of about 1.2% of FPI holdings.

In FY22, it was about 0.92% and so far in the first two months, it is another 0.3% of the overall FPI holdings in India. Altogether at 1.2%, it is not a very large number to make one say that FIIs have been exiting. The impact of those is always quite big because they are very selective in where they invest. One will not find meaningful FPI holdings in more than 200-250 odd companies. I think both BFSI as well as IT got impacted because of the FPI outflow in these shares.

Compare this 1.2% with 1.5% FII outflow during GFC. So, we are still quite away from that number. Also, these funds will come back whenever there is an opportunity. The opportunity can be either because the valuations are now much more reasonable or probably there is ease of liquidity again for them to come back to equities and then to emerging markets.

In an interview with our sister channel ET Now in January 2022, you have said that the next two decades will be golden period for India. Do you still hold on to that hypothesis?
I think these are part and parcel of the game. Long term is always made of lots of short terms. A decade for a company is made up of 40 quarterly results. One or two quarters here and there, probably will not change the big picture.

But if you sit back and see how things have played out in the last six, 12, or probably 24 months, I would say that conviction is only getting stronger. Globally India is the best example of a country in terms of how it has come out of Covid.

It is not that we did not have losses in terms of lives or that our economy did not get impacted. All that did take place but the way we have turned around and have come back both in terms of how we controlled Covid and how our industries have rebounded and the economy has rebounded.

More importantly, India is now perceived globally not just as an investment destination but also a major power. India is now on the verge of becoming the next superpower. What used to be Russia and the US and then Japan emerged and then China emerged… There will be a new place for India and globally the weight of India – whether in corporate or political circles – has gone up in the last two-three years.

We believe India will go through the three decade story which has happened in the case of Japan between 1960 and 1990 and; China between 1990 and 2020. Our belief is 2020 to 2050 will be the golden era for India both because of the positive demographics as well as India becoming a saviour of the world in a China plus one strategy. Things are coming together for India. We have been waiting for this for almost two or three decades and finally we believe this is the time for India.