Next Three Months 'Tricky' For Indian Stock Market, Says SageOne's Samit Vartak

SageOne Investment Managers' Samit Vartak says the next two to three months could be really tricky for Indian markets amid uncertainty due to Fed rate hikes, the budget, and recent earnings decline.

"I have seen in the recent past that the quality of earnings has definitely taken a downturn," Vartak, founding partner and chief investment officer of SageOne, told BQ Prime.

While earnings rose in the high single digits in the trailing 12 months, the cash flow from operations has gone down sharply by 19%, Vartak said.

The enterprise value-to-cash flow from operations ratio, which was 16–17 times last year, has jumped to 22 times this year, almost hitting the highest level of 24, Vartak said, calling it "pretty high".

Advising caution, Vartak said there isn't much to worry about but flagged cash flow valuations as stretchy.

But this is not the only factor. The global markets, Vartak pointed out, have corrected as well. The Nasdaq has fallen 33%, and the S&P is down more than 20%, he said.

"The difference is very stark, and the other markets can become much more attractive," Vartak said. Investors need to consider the cash flows of companies and not just the P&L and balance sheet, he said, calling interest rates a "big drag" on valuations.

As a fundamental investor, Vartak feels it is better to stick with his strategy of finding companies that have the potential to double earnings over the next three to four years, along with a reasonable valuation.

Vartak bets on the "circle of competence" when it comes to investing. "It depends on whether you are competent enough to understand these pockets of the market, whether it's defence or whether it's the PSU banks."

Smart investors, he said, had been investing in these sectors for the last four to five years before it played out. It is a difficult hold, but someone who held to these themes minted money, according to Vartak.

Vartak said most of the money investors make is in areas that are structurally intact in the long term but currently show pessimism.

Segments that have a global presence, such as contract manufacturing in pharmaceuticals, niche specialty chemicals, the power sector, building materials, and real estate, are the pockets where people are not that bullish, Vartak said. These are really long-term structural stories, he added, saying that these themes should work out well because valuations are attractive.

The export-oriented themes saw huge headwinds due to higher freight and commodity costs. However, those costs have come down to pretty normal levels, which could actually turn the tables and become tailwinds for these sectors, according to Vartak. "A slowdown in the global economy helps India."

The announcements of private capex in India were at Rs 20 lakh crore in 2022. That compares to Rs 11.7 lakh crore in 2021 and less than Rs 10 lakh crore during the pre-Covid era, he said.

These announcements have increased due to production-linked incentives and other such measures.

Even if 60–70% of these play out, that is a huge investment in the private segment, along with government capex, separately, Vartak said. "That definitely is a huge tailwind for building materials."