What’s next with NIFTY? Have we reached the peak?

What’s next with NIFTY? Have we reached the peak?

So, the most boring and most heard statement you all must have heard is that this is India’s decade, right? But what we’ll do is build up upon this argument that why are we thinking it is India’s decade.
We’ll share facts and data to make it more relevant for you to understand the context in which we are discussing that.

So, to take an example, if there is an issue with some other family, we, as outsiders, can understand that problem. However, existing members at times may not realise what’s going wrong. Similarly, we,
as a country, the way we are growing and developing, we are a very small part of this country, right? And we may not understand the time our country is going through whereas investors globally are
extremely excited about India.

So, we need to understand what we need to do in terms of our investment, in terms of how this
country will grow, and we have to be on the same page as the global investors in terms of how they
think about India.

One most important things that we all need to understand is that the rate at which India is growing
right now is nowhere close to the second fastest growing country. So, for example, for entire last
decade, the US was growing at, say, 3 to 4% and they had an ination of around 2, two and a half, 3%.
So, they were growing at a nominal growth rate of around 6-7%. At that point of time, most of the
emerging economies including India were growing at a nominal GDP growth rate of somewhere
around 9 to 10%.

So, there was a dierential of around 400 bps, right? And we were pretty small then, we were
only a $2 trillion economy, and the US was $20 trillion. So, for anyone to take an investment call,
you would always think it’s far better to invest in a land which has so many opportunities because
they are $20 trillion, whereas $2 trillion will over you limited choices, limited opportunities. So, the
entire last decade belonged to the developed world where they were growing at a much faster pace, and
they were much bigger in size.

Now, if you look at it post-COVID, the way things have shaped up is that the developed world is growing at only 1% with an ination of almost 3 to 5%, anywhere between that range depending on the country. So, the US is at 3 % and a few other countries are at a much higher inflation level.

Whereas India, we are growing at closer to 7.5% right now and we have an inflation of almost 5%.
So, our nominal growth rate is almost 12% versus all other countries’ nominal growth rate at around 3
to 4%. So, the gap of 4% earlier is now 8%, which is very signifcant for all the large global investors. So,
just like you all take your investment decisions in terms of dierent products, this product is oering
you, suppose, 12 %. Whereas some other product
is oering you 15% and some other product
is oering you 8%, you would always evaluate
products which are giving you 12 and 15% and the
risk associated with that.
Similarly, large investors globally are now looking
at countries which are growing at much faster pace
because the developed world is not growing to that
extent. When I say developed, it’s mainly US and
Europe, they are not growing at that faster pace.
And therefore, India, from a $2 trillion, we are now
at $4 trillion; we have the size, we are the world’s
h largest economy and our market cap is also the
fourth highest.
With that kind of size and scale, we are growing at
almost 12% which is 8% higher than the developed
world. So, a lot of money from the developed
world will move into India mainly because of the
higher growth rate and now because of the larger

scale and size. So, we all need to understand that
this 10 to 12% nominal GDP growth will attract
a lot of money. Just like there will be ‘n’ number
of products which come to the market and which
are supposedly oering good returns, they are able
to raise good money from the investors because
everyone wants to park and invest their money in
those opportunities. Similarly, now India has come
of age both in terms of growth and in terms of size
which will attract a lot of money and as we all know
whenever the river is owing, you will automatically
end up getting the benets of it.
So, a lot of money will ow into this economy over
the next 3 to 5 years or 10 years. As an investor, as
an entrepreneur, it is up to us to pick the choices
and opportunities and a lot of money can be made.
Now, in this whole big picture what worries me is
that everyone wants to look at what will happen
over the next 15 days, over next one month or
maybe over the next 3 months. But the moment
you start taking a longer term horizon and I’m not
saying a 10-20 year longer term horizon, but you
should ideally start with at least two year kind of a
horizon and take it to ve years, you will eventually
see that you are able to navigate all the volatility and
on top of that your returns will be far superior than
even what you would have thought of.
So, with this background, I’ll give you a perspective
in terms of where we are placed; we’ll go deeper into
what exactly is happening in the country, what’s
actually going through the markets, we’ll go into all
of it. But at the 30,000 feet view, I think one needs
to understand that our growth and size is far better
than any other economy in the world which will
attract a lot of ow.
You mentioned that the Indian economy is now
at $4 trillion, we’ll soon hit $5 trillion. It’s only
a matter of numbers. It could be in one year o2
two years and soon will be a $10 trillion economy.
So, how do you suggest that at these levels of
22,000 one should be looking at equity allocation
towards, let’s say some are new investors and some
are existing investors, how should they play it?
e quantum of wealth one would eventually make
or accumulate, the primary function or primary factor behind that would always be your asset
allocation. So, in my experience, I have seen that
most investors I have met have an asset allocation
that is not helping them over a longer period of
time. So, most of the investors I met had investment
into land to the extent of almost 95%. So, out of the
Rs 100 wealth, they had 95% in land and only 5%
in xed income. ey had zero exposure to equities.
Now, my point is that we all need to understand
what equity as an asset class is, and I keep giving this
example and maybe because I have my own biases
towards it. But I personally feel that there is no
better asset class than equity in this entire world.
It may have its own volatility; it may have its own
drawback but I strongly feel that you know there
is no better asset class and I’ll give you only one
strong reason behind that. If you look at the fabric
of the country – the number of entrepreneurs who
have come up over last 15 years has been multifold and most important is that everyone is hungry
for growth. So, as an investor, I don’t need to start
multiple businesses. If I am able to identify a solid
promoter, solid entrepreneur and a solid business, I
just have to partner with him by buying the shares.
For example, when Bajaj Finance came into
existence 15 or maybe 20 years back, they were
doing only Rs 200 crores of prot, and their market
cap was Rs 2000 crores. Over the last 15 years, that
company has grown from Rs 200 crores prot to
Rs 15000 crores, and their market cap has gone up
from Rs 2000 crores to Rs 4.5 lakh crores.
Now, you don’t need to start a lending business,
you don’t need to start nancing autos, you don’t
have to do anything, you just have to identify these
kinds of promoters and businesses. You have to
buy their shares of the basis of what you want to
allocate. And stay invested in that business like
a partner rather than selling when it goes from
1000 to 1200. I am saying, you have to be attached
to the business to the extent of saying that if this
company can grow at 30-40% I will continue to
stay invested in this company. Because in no other
business I can make 30% for myself. So that is the
kind of opportunity you will always get within
equities. People may have their own apprehensions,
but I strongly feel that it gives you an amazing
opportunity to identify businesses, stay invested
with them and grow your wealth rather than you
having a disproportionate amount of investment in
land.
Land will also appreciate over
a period of time; gold will also
appreciate over time, but the
key reason behind your wealth
creation will be your asset
allocation.
And, therefore, coming back to his question of
how we should allocate. Many times, investors
ask, should we enter the markets now? I think the
question to be asked to yourself is whether or not
you are adequately allocated in equities. Out of
your Rs 100, if you are allocated only to the extent
of Rs 10-15 into equities, I don’t think you need
to ask anyone. First, you have to take it up much
higher because it is an asset class which is growing
at at least 15%. ere is a clear visibility and there
are so many companies where you can invest and
increase your allocation.
If you are not investing into companies, you can
invest with good managers into mutual funds.
ere are not many equity products which can give
you 15% at least compounding. And, which give
you that kind of data on your wealth creation. So,
my point is that when you decide whether you want
to invest in the market, you have to rst ask yourself
what is your allocation?
It is a question relevant for people who, out of Rs
100, are always invested Rs 90 into equity. ey
are running a risk because if the market goes down,
they are almost 90% deployed into equities and
therefore they can get really you know hurt if the
markets go down.
But for someone who is invested only 15%, even if
the market goes down 20%, the impact will be only
Rs 3 on Rs 100 which is nothing.
So, my point is that rst get your asset allocation.
I am not saying only equities but between xed
income, real estate, gold and equities you need to
get your right asset allocation so that you know over
a period of 5, 10, 15, 20 years you can get a decent kind of a compounding on the entire Rs 100.
In today’s scenarios how would you like to play
it? Would you want to play it through large caps,
through mid -caps, small caps? ere are so many
options for an investor. How do they select what
to play for and how long they should play? I think
you’ve said it’s a long-term horizon, but how long
should it be for any investor?
Before we go there, Sudeep, I think I’ll just
substantiate more on why we are thinking this is
more of India’s decade and then maybe we can
talk about dierent themes and ideas. How can
we invest? See, in any economy, there are three big
pillars, right? First, the households. So, all of us, we
are nothing but households who end up consuming
and that eventually drives the growth for any
economy. So that is the rst part. Second part is the
corporates. Because corporates do business that we
consume and they pay taxes in a very big way, they
generate employment and they become an integral
part of any economy. So that is the second most
important pillar. And the third most important
pillar again is the government itself, right? Because
at the end of the day, the government also has to
spend money on various things, including social
welfare or infrastructure or many other industries
where they are involved. ey also have to spend
a lot of money. ese are the three things which
eventually drive growth for any economy.
If we look back, the US was doing exceedingly well
but what is the position of the US right now? So,
the US is sitting on a $35 trillion debt which is
costing them right now 5%.
We can imagine any company or
household that has signicant
debt at a higher cost, it will be
impossible for them to grow at
a faster pace. And if you look at
India now and compare it with
the developed world, we are in a
very good position.
We have a much lesser debt versus any other
developed country. e US has an interest rate of  5% and is growing at only 1% while we have a rate of
interest at 7% but growing at almost 12%. So we are
in a far better position in terms of the government
because they will not be spending that much on
interest and therefore you will hear the budget –
they are spending Rs 11 lakh crores on the overall
infrastructure which is a very big number because 5
years back they were spending only Rs 3 lakh crores.
And today, over the last 5 years, they have started to
spend Rs 11 lakh crores in a single year.
So, government revenues are in a fantastic shape
because if you look at the GST revenues, the direct
tax revenues and the indirect tax revenues, all of
it put together – the government kitty is really in
good shape to keep spending more money. Coming
to households, things have changed signicantly.
Earlier, most households would think that it is
more important to save money and therefore as a
country our savings rate was as high as almost 38-
40% at one point of time.
Today we all have realised including all the dierent
generations that we want to live a better lifestyle,
we want to upgrade our life and therefore enough
of savings; we will save but it will be more moderate
and we want to spend more and consume more.
So that actually drives any economy. And most
importantly Indians are averse to taking a lot of
debt, so the debt for any household is in a very
moderate number which actually gives them the
comfort to go and spend more when they are
earning more. So households are in a good shape.
Government is in good shape.
Coming to the corporates, you know why the index
is going up year aer year; it is mainly because of the
prot. Eventually, stock prices will always be a slave
to earnings. We may feel the stock has gone up, but
stock has gone up mainly because the EPS of that
particular company has also gone up. Without EPS
going up, stock will not go up. Similarly, Niy is
at 22,000 right now because Niy’s earnings have
compounded at 15-18% over the last four to ve
years. erefore, corporates are making a lot of
money, there is signicant growth and therefore the
markets are doing so well.
So now, if you correlate all the three things:
households, corporates, and government, this is a
scenario we haven’t seen in India before because
historically, either the government is in a mess, or
the corporations are in a mess. Neither of the two
generally are not doing that great but this time
all the three are in fantastic shape and which can
actually drive growth in a very big way.
Now coming back to your question, Sudip, in terms
of how we should look at markets. Ideally, if you
look at the Niy EPS, what I just explained in FY
25 will be Rs 1100. When we look at the numbers
of all companies put together which are part of
Niy, when you do a weighted average of the Niy
earnings, it will be closer to 1100 and FY 26 which
is the following year the EPS will be Rs 1250. Now,
a broad multiple for Niy over the years a very
base case multiple over years has been 20 times for
India. If you look at it on 1100, we are trading at
22000 which is 20 times. But 6 months from now,
we are in March right now, the moment we get into
October, we’ll start looking at FY 26. And if you
give 20 times to 1250 rupees EPS, which is in FY
26, you come to a number of around 25,000. So, my
point is that we keep saying that Niy has gone up
from 17,000 to 22,000. But during COVID, Niy’s
EPS was only Rs 450. From FY 20 till FY 24, we
have moved from Rs 450 to Rs 1100. en why not
markets also rally from 10,000 to 22,000. So, it is
a function of the growth and the multiple. We are
not stretched on both sides. And it is up to us how
we want to allocate between large caps, mid caps,
small caps.
So, are you saying that we should invest in Niy
more or mid caps more?
It always comes down to the risk appetite of the
investor and the investor’s goals. But I would
just like to share that large caps are more mature
businesses. So, something like say HDFC bank or
Infosys or Maruti, these are all mature businesses
which can grow at maybe 10 to 15% or at max
20%. And mid and small cap businesses are those
which generally grow at two to three times nominal
GDP growth. So, if the nominal GDP growth is
say, suppose around 10-12%, mid and small cap
companies can grow at 25 to 30%. But there will
always be a risk associated with those companies
because when you are growing at a faster pace, you can see some sort of accidents on the way.
I am not saying that they will fall apart. But
eventually, if the growth rate is maintained at
25-30%, these small and mid cap companies will
eventually become large cap companies. And that
is how when we discussed Bajaj Finance or even
Eicher Motors.
So Eicher Motors is the company that manufactures
the Royal Eneld bikes. 15 years back, Eicher
Motors was a small cap company. ey had a
market cap of only Rs 2,000 crore and they used
to make 50,000 motorbikes in an entire year.
ey used to make 50,000 and the stock price was
trading at somewhere around Rs 45 with a market
cap of Rs 2,000 crore. So, it was a very small cap
company. Today, actually if you see over the last
15 years, they are making 80,000 bikes in a single
month. From 50,000 annually they are making
80,000 motor bikes in a month which means a
million bikes in a year versus 50,000 earlier and
from Rs 45, the stock price has gone up to almost…
you all must be seeing Rs 30,000-35,000 kind of a
numbers. e market cap has moved from Rs 2,000
crore to almost Rs 1,20,000 crore.
So, small cap and mid cap
companies may have some sort of
risk associated, but if you are able
to identify businesses which can
scale big and partner with them at
an early age, eventually you will
compound your wealth at a much
faster pace versus the large cap.
So, I think large caps are more mature, mid and
small caps are more trend based, growth based, and
we have to gure out what trends we see in that
whole space.
Coming back to mid caps or small caps, last year
starting March, we had a big rally in the mid
cap space, right? But in the last few weeks, a
few months, the rally has been going down. e
markets on the mid cap, small cap have been going
down. So, what is in store for the mid caps, right?
Is it done for the time being? Is it there for the
long haul? And how should one play? Like you said, not everyone can pick up a Eicher Motors
or a Bajaj Finance. So, what’s the right investment
strategy towards that? And, just to add, what are
the other sectors that you think will do well in the
coming years? So, the entire mid and small cap
space, I think, has to be played more from a theme
perspective.
Every now and then you all must have seen that
certain sectors are in the high growth phase and
therefore stock prices also end up doing really well.
You must have seen that post COVID, mid cap IT
companies, most of the mid cap IT companies did
exceedingly well.
So, something like say Persistent which was trading
at Rs 400 during COVID. And today, the stock
price is at Rs 9000. Similarly, there are ‘n’ number
of companies which have done really well over
the last 3-4 years because that was a big trend and
most of the companies who were part of that trend
beneted in a very big way.
As of now, we are seeing 3 really big trends within
the mid cap and small cap space which can play
out over next 5 years. And companies within that
theme can also benet in a very big way. So, one
most relevant theme that all of us can relate to is the
whole premiumisation theme. Premiumisation is
nothing but more of how consumption will play out
in this country and I will just share a few data points
for you to understand how relevant it is.
Whatever consumption is taking place in this
country is being done by broadly 10 crore people
out of a population of 140 crore. 10 crore people
are actually spending money and consuming
things. But what is relevant is that out of this 10
crore people around 25 to 30% which is 2.5 to
3 crore people are completely price inelastic. So,
what happens is that there is a group that go to
restaurants every week, or every month and they
have to go shopping or every quarter they have to go
on a vacation. So, they are completely price inelastic.
We believe that these 2.5 to 3 crore people over the
next 5 years will become 10 crore people. So, in this
country, when you have a population of 10 crore
people who are completely price inelastic and want
to spend more money, you can imagine the kind of
explosion we will see on the consumption side.
So, when I say consumption, it’s everything from
apparels, footwear, hotels, restaurants, airlines, two
wheelers, four wheelers all these things put together
the consumption can actually explode if you have
a 10 crore population spending money at the same
point of time. So this is one really big theme of
consumption and premiumisation where we are
identifying companies who are pretty small right
now and when I say small it’s not micro cap but mid
and small cap companies who, over the next 3 to 5
years, can become really big.
e second big theme is the whole export
opportunity we have. Either it is because of China
plus one or Europe plus one, but there are a lot of
global players who are de-risking or I would say
diversifying their supply chain and many of India’s
sectors are beneting. So, what happened is that 5
years ago no one used to talk about chemicals as a
sector. Today, chemicals have become a very large
sector because more global players are outsourcing
their requirements from Indian companies.
Similarly, we are seeing the same thing happening
with the API manufacturers or the semiconductors
or the auto ancillary and a lot of smaller sectors are
getting inquiries from global players in terms of
export opportunities.
So, that is an export opportunity, of which we
are seeing a very big trend and last and the most
important again is the way infrastructure is playing
out in this country.
In most tier 2, tier 3 cities or any city where you
travel, the level of activity on roads, railways, ports,
airports has gone to a next level. e way it works
is that when the government is spending so much
money on infrastructure, private companies get
these orders, and they execute and benet in a very
big way. So, these three themes put together: one is
consumption, one is export opportunity and one is
infrastructure. If you are able to identify companies
within these three trends, they can become really
big over the next three to ve years.
Ajay, as everyone is aware, elections are just
around the corner. So, what are the key risks you
see? Are there any risks that can be seen or are
available but people are not able to see it? What
is your view on that and can you predict the outcome of the elections?
So Sudeep, I am no political expert actually and I
have no view on this, but I think most of us who are
here have seen the kind of development, popularity,
and condence which the majority of the
population is already having. So, the same question
came up during state elections of Rajasthan and
Madhya Pradesh and everyone was sitting on the
sideline thinking that they might not win those
states and suddenly the verdict was out, and the
index went from 18000 to 20000 very quickly. So,
my sense is that we should not be in the business of
predicting what will happen in the election.
We have seen the worst of events
which was COVID, nothing can
get worse than COVID and we
have recovered out of it and the
index has done so well because
companies are making good
prots. Eventually, as I said,
the stock prices will be slaves to
earnings.
So, I hope BJP government and I am sure they
will come into power, but I am just trying to say
that even if that doesn’t happen in a rare scenario,
companies are not going to stop working,
companies will end up making prots, there can be
some sort of correction in the market but eventually
you will see no compounding continue.
ROTARIANS ASK
Now, someone who’s not a traditional investor
like us, when we see you as an investor, we see
a lot of news and a lot of videos going around,
saying the markets are going to crash, etc. What
is it that an unconventional investor like us
should do to verify if the information is right or
not?
So, good question. From my experience, I’ll just
say one thing, that whenever there is so much
negativity or everyone is expecting things to
happen, it will never happen. erefore, when we
started the fund three years back on this platform
at that time index was 14,5000. At that time, we
used to meet a lot of investors, and everyone had the same answer, that we have moved from 8,000
to 15,000, and now, the index will not go beyond
this. at was the feedback we got and eventually
they stayed out of the markets and market went to
almost 22,000. So my thing is that you know there
is no need to verify. e only thing you should do
is get your asset allocation. If you are not invested,
you should be there in equities and how you can get
into equities is get convinced with two things-—
one is the manager and one is the strategy. So, if you
are convinced with the fund manager and if you
are convinced with the strategy with which he is
operating I think you can start allocating to equities
if you are not allocated.
Everyone’s been talking about the China plus
one strategy and it’s India’s decade like you
yourself mentioned and there’s a lot of foreign
investment waiting to come in. So, when is this
FI investment going to come because so far, I
think we’ve only seen a trickle if at all?
You are right. So why it does not come is what we
need to understand because eventually the money
ow is dependent on the rate of interest. As of now,
over the last one and a half-two years, we have seen
interest rates moving from 0% to 5% and global
investors generally don’t end up investing into
emerging markets when the interest rates are so
high because they are smaller economies, and they
can be vulnerable to a lot of shocks. But now, as we
all know, that Fed is going to reduce rates maybe
not now but six months, nine months down the
line, you will see a lot of money coming in once
the interest rate starts coming down because then
investors would be having a lot of cash, and a lot
of money at a much lower rate and therefore the
return dynamics will look far favourable. So, you are
right, but also I will just add one more thing here.
When you say money has not
come in that is more to do with
the stock market but if you look at
the FDI ows, the money that has
gone into several businesses, it is
a very strong number. It has been close
to $40-50 billion which is a very big number versus
what we used to get earlier. So, money is coming
into India but in a different route.
FPI, which is the FII community, have been on and
o right now mainly because that is hot money and
that is more dependent on the interest rate cycle.