'Valuations in Indian Equity Markets No Longer cheap': Arun Malhotra, Capgrow

Arun Malhotra, Founding Partner & Portfolio Manager, CapGrow Capital Advisors, brings along 30 years of experience in the Indian capital markets. In 1997, he helped set up DBS Capital Trust's, part of DBS Bank, Singapore, Indian equity broking operations. He speaks to BW Businessworld's Ruchit Purohit. Edited excerpts:

With Sensex now at 60,000, where do you see the markets headed in the near to medium term?

The market is driven by the positivity generated by the opening up of the economy and the growing pace of vaccinations leading to reducing signs of any third Covid wave. The improving Covid situation will ensure no significant disruptions to any economic activity in the near future. The economy is close to the pre-pandemic levels on the majority of the economy parameters. The small and mid-caps have seen signs of frothiness that should correct in my view, while Large caps offer a decent opportunity. Overall, the markets have had a continuous run since last March and may pause and consolidate at these levels.

Will tapering of bond buying programs by the U.S. Fed in a calibrated manner could hurt domestic market sentiment going ahead?

Tapering of the bond programme by the U.S Fed will reduce the liquidity and may hurt the sentiment in the short term, but we believe it will be a gradual process not to disrupt the markets. However, in U.S markets, esp a few pockets in technology, SPACs, and other sectors, have some excesses built-in that need to be corrected.

Is the market poised for a correction or do you expect the upward trajectory to continue?

I expect the market to consolidate here. A 5-10% correction is possible anytime in equity markets and is also healthy in bringing sanity and rationalism. I believe that the Indian economy has seen many structural changes in the past few years, the fruits of which are being reaped now. An example is the Real Estate sector that has seen good momentum in sales and pricing in select markets, and we believe RERA is one of the critical drivers of this change.

How are you looking at the upcoming earnings session? Which sectors will possibly outperform, and how will it turn around specifically for banks?

The upcoming earnings season will be strong, driven by pent-up demand and a low base last year. The consumption seems to be in full swing, led by sectors like tourism, hotels, restaurants that will recover quickly as the pandemic-induced restrictions are eased out. The upcoming festive season will be strong, and there is an upside risk to the consensus numbers. Banks, esp. large sizeable private sector banks, will continue to do well. We would also witness substantial recoveries from NPA accounts (DHFL etc.) for a few public sector banks this quarter. We are past the NPA cycle, and the banks are well capitalized to capture growth.

India's IPO pipeline remains strong. Do domestic investors have the appetite for betting big on forthcoming large-sized public issues?

IPO frenzy is a concerning factor for me. The IPO pipeline is also robust and will absorb some of the liquidity. We have seen strong responses to the recent IPOs, and I believe some of the ones lined up in the near future have a unique and non-linear business model, especially policybazaar.com, Paytm, and Nykaa. We have seen higher equity participation from retail in the past, and they have the appetite to absorb the forthcoming large IPOs.

What are the likely risk factors that could spoil the party on Dalal Street?

Valuations in Indian equity markets are no longer cheap and remain a concern. The other risk factors are the U.S markets that could spoil the party. The U.S is sitting on a triple whammy- high bond prices, high real estate, and high equity prices, and remains a risk in the future that could hurt the global markets, including India. China remains a risk driven by a sort of bubble being created- expensive Real estate, high credit to GDP ratio and the extent of over investment, and lack of sufficient reliable economic data. I don't see Covid third wave as a concern as the rising inoculations and better hospital infrastructure will ensure fewer disruptions.