Shreyash Devalkar, Fund Manager, Axis Mutual Fund, recent GDP growth numbers for FY25 and Q4 met expectations. US flows are aiding the market. Despite lower volume growth, valuations are high. The IT sector's growth and PE ratio trends are an example. Globally, IT service valuations have shifted due to higher cash flows. Current valuations exceed what growth justifies. Careful stock picking is essential in this market.
Indian markets have had a strong. Will this party continue and if yes, why and if no, why not?
Shreyash Devalkar: You have been highlighting one point which is true as far as overall markets are concerned – good macro, in which there is low interest rate, low commodity prices, and fiscal deficit in control. The recent GDP growth numbers released for FY25 and Q4, have not shown much deviations from the expectations though the numbers are not what the market expected a year ago. But as of now, there is no deviation.
So, broadly, combining all these factors we see definitely the flows from the US are there and that is definitely helping the market. And despite relatively lower growth on the volume front especially, the valuations are definitely high. I always give an example of the IT sector. In the first decade of this century, the IT sector used to grow at 15% with around 20-25 PE.
In the second decade, it grew at around 10% with 15-20 PE, and now it is growing at around 5% with around 20 PE. So, the growth is low and the valuations are definitely higher than expected. Some of these valuations are not only in India and if you see IT services globally and take similar companies like Accenture in the US, there also they have seen some changes in valuation, the most appropriate reason is actually over the last three decades, the higher cash flows and higher payouts which this sector has witnessed. But broadly for various reasons, we can try to attribute one thing or other for every sector per se. Valuations are now higher than what the growth would warrant. So, one needs to be very careful in terms of stock picking in this kind of market.
Is it okay to say that the macros are looking much better than the micros. Will that be a fair statement? The rupee has stopped falling. Inflation is coming under control as are bond yields. There has been an early onset of monsoon. Are we in for macro dominated rather than micro dominated trade now?
Shreyash Devalkar: Yes, this has been the case probably for one year to one-and-a-half years. Just one year ago, this trade had started because over last year we saw earnings cut and since September of 2024, the market started reacting to the micro numbers. If you remove even Trump trade related fall, before that also, there was a substantial fall and that was micro related. So, let us not totally ignore the micro and earnings growth. This phase has been a reminder of that and that is where on a one-year basis and so on, the returns as such are not as lucrative as one would like to have. So, definitely macro is good and it provides some downside protection to the market, but micro would be important to make money in individual stocks.
We just concluded the Q4 earning season. Help us understand what were your key takeaways from the earning season? Other than that, which sectors do you believe offer an opportunity for long-term investors? Have you spotted any standout sector?
Shreyash Devalkar: As far as the season is concerned, it was good versus expectations. What is happening currently is that since the last two-three quarters, the earnings are getting cut ahead of the earning season and expectations are getting revised downward prior to the earning season. So, generally, the earning season is not seeing as much cut as far as the period of approaching the earning season and that is why you have seen that not much reaction to the earning disappointment during the earning season per se. The stocks actually fell, as I said, from September onwards itself.
If you take the largecaps represented by Nifty 50, then the growth has been less than 5% overall, while the broader market growth has been around 8%. Good growth in the context of valuation, has been in financial services in the last quarter in terms of NIMs versus expectation. Growth as well as asset quality have been good in some of the oil marketing companies, and the frontline capital goods companies as well. Only a part of the margin is where the focus is on the market especially when it comes to the capital goods and auto kind of cyclical sectors.
Otherwise, the earnings are broadly in line with expectations. Since earnings are getting cut for the last three-four quarters ahead of the earning season, I see that FY26 earnings may not see further cuts beyond a point because the market has tried to factor in the recent trends in the earnings in FY26 as well. FY27 is where the entire bulge is when it comes to the earning growth expectation. As far as near-term earning cuts are concerned, we are broadly there.
What in this market is cheap but not good and what is good and yet cheap?
Shreyash Devalkar: That part has been the case again for the last eight months or one year or so. So, the largecap of India mostly if you take bank, FMCG, IT, largest companies some of them, point is that since they are so large their growth is very much dependent on GDP growth and at 6-7% GDP growth whatever are the numbers for that and if there is expectation of the GDP growth further improving from here, with that expectation definitely the largecaps are reasonably valued compared to their growth expectation.
If GDP growth accelerates, then largecaps can give better risk-adjusted returns. When it comes to mid and smallcaps, this conundrum has been there for the last three years now. It is not today's conundrum that largecap lacks growth while valuations are reasonable and midcap, smallcap the growths are better than the largecap but valuations have got elevated quarter after quarter.
A 20 PE mid, small great growth story, became 30, 40 after every quarterly result season. Even in this quarter, the same thing would have happened and initially largecaps outperformed. But post the result season, many of the mid and smallcaps because of the good earning growth delivery have caught up.
As an investor, if I am running a diversified portfolio, we are looking at a mix of both. So, just for the sake of reasonable valuations, one need not be entirely in the low growth segment. At the same time, one should not totally ignore some of the companies where the valuations are high, but the growth stories are intact. So, reasonable valuation is what we are looking forward to in our diversified funds.
Indian markets have had a strong. Will this party continue and if yes, why and if no, why not?
Shreyash Devalkar: You have been highlighting one point which is true as far as overall markets are concerned – good macro, in which there is low interest rate, low commodity prices, and fiscal deficit in control. The recent GDP growth numbers released for FY25 and Q4, have not shown much deviations from the expectations though the numbers are not what the market expected a year ago. But as of now, there is no deviation.
So, broadly, combining all these factors we see definitely the flows from the US are there and that is definitely helping the market. And despite relatively lower growth on the volume front especially, the valuations are definitely high. I always give an example of the IT sector. In the first decade of this century, the IT sector used to grow at 15% with around 20-25 PE.
In the second decade, it grew at around 10% with 15-20 PE, and now it is growing at around 5% with around 20 PE. So, the growth is low and the valuations are definitely higher than expected. Some of these valuations are not only in India and if you see IT services globally and take similar companies like Accenture in the US, there also they have seen some changes in valuation, the most appropriate reason is actually over the last three decades, the higher cash flows and higher payouts which this sector has witnessed. But broadly for various reasons, we can try to attribute one thing or other for every sector per se. Valuations are now higher than what the growth would warrant. So, one needs to be very careful in terms of stock picking in this kind of market.
Is it okay to say that the macros are looking much better than the micros. Will that be a fair statement? The rupee has stopped falling. Inflation is coming under control as are bond yields. There has been an early onset of monsoon. Are we in for macro dominated rather than micro dominated trade now?
Shreyash Devalkar: Yes, this has been the case probably for one year to one-and-a-half years. Just one year ago, this trade had started because over last year we saw earnings cut and since September of 2024, the market started reacting to the micro numbers. If you remove even Trump trade related fall, before that also, there was a substantial fall and that was micro related. So, let us not totally ignore the micro and earnings growth. This phase has been a reminder of that and that is where on a one-year basis and so on, the returns as such are not as lucrative as one would like to have. So, definitely macro is good and it provides some downside protection to the market, but micro would be important to make money in individual stocks.
We just concluded the Q4 earning season. Help us understand what were your key takeaways from the earning season? Other than that, which sectors do you believe offer an opportunity for long-term investors? Have you spotted any standout sector?
Shreyash Devalkar: As far as the season is concerned, it was good versus expectations. What is happening currently is that since the last two-three quarters, the earnings are getting cut ahead of the earning season and expectations are getting revised downward prior to the earning season. So, generally, the earning season is not seeing as much cut as far as the period of approaching the earning season and that is why you have seen that not much reaction to the earning disappointment during the earning season per se. The stocks actually fell, as I said, from September onwards itself.
If you take the largecaps represented by Nifty 50, then the growth has been less than 5% overall, while the broader market growth has been around 8%. Good growth in the context of valuation, has been in financial services in the last quarter in terms of NIMs versus expectation. Growth as well as asset quality have been good in some of the oil marketing companies, and the frontline capital goods companies as well. Only a part of the margin is where the focus is on the market especially when it comes to the capital goods and auto kind of cyclical sectors.
Otherwise, the earnings are broadly in line with expectations. Since earnings are getting cut for the last three-four quarters ahead of the earning season, I see that FY26 earnings may not see further cuts beyond a point because the market has tried to factor in the recent trends in the earnings in FY26 as well. FY27 is where the entire bulge is when it comes to the earning growth expectation. As far as near-term earning cuts are concerned, we are broadly there.
What in this market is cheap but not good and what is good and yet cheap?
Shreyash Devalkar: That part has been the case again for the last eight months or one year or so. So, the largecap of India mostly if you take bank, FMCG, IT, largest companies some of them, point is that since they are so large their growth is very much dependent on GDP growth and at 6-7% GDP growth whatever are the numbers for that and if there is expectation of the GDP growth further improving from here, with that expectation definitely the largecaps are reasonably valued compared to their growth expectation.
If GDP growth accelerates, then largecaps can give better risk-adjusted returns. When it comes to mid and smallcaps, this conundrum has been there for the last three years now. It is not today's conundrum that largecap lacks growth while valuations are reasonable and midcap, smallcap the growths are better than the largecap but valuations have got elevated quarter after quarter.
A 20 PE mid, small great growth story, became 30, 40 after every quarterly result season. Even in this quarter, the same thing would have happened and initially largecaps outperformed. But post the result season, many of the mid and smallcaps because of the good earning growth delivery have caught up.
As an investor, if I am running a diversified portfolio, we are looking at a mix of both. So, just for the sake of reasonable valuations, one need not be entirely in the low growth segment. At the same time, one should not totally ignore some of the companies where the valuations are high, but the growth stories are intact. So, reasonable valuation is what we are looking forward to in our diversified funds.
