Responding to a query on whether markets have already absorbed the impact of the West Asia tensions, Dharmesh Kant from Cholamandalam Securities said the pressure on equities had begun even before the latest geopolitical flare-up.
“I do not think the poison is out of the system. I mean, there are two parts to it. Before this West Asia crisis happened or the Anthropic event happened, the market was already under pressure, there was selling happening despite Q3 numbers being good in anticipation that numbers are likely to be better. So, the point what I am trying to make is whether 12% to 15% kind of an earnings growth is good enough for two times of PE multiple on the indices which is undergoing a resetting kind of a last one-and-a-half year is suggestive of that,” he said in an interview with ET Now.
According to Kant, the geopolitical developments have merely accelerated an already ongoing correction. He pointed out that the current situation in West Asia could remain prolonged, which may keep markets volatile.
“Having that at the backdrop of the entire scenario, these news flows just fasten up, hurry up the selling pressure which is there in the market. So West Asia is still very early stage. Iran over 20-25 years they have a tendency to prolong the war and they do not give in easily, Iraq-Iran war is a testimony of that. So, this is going to aggravate and extend further,” he said.
He warned that the conflict could lead to supply-driven inflation pressures, adding another layer of uncertainty for global markets.“So, the headwinds in the form of supply-led inflation is likely to be there. How it is to be negotiated is again ad hoc kind of a mechanism and we will be reacting to day-to-day news in the market. So, the selling may slow down. I mean, the capitulation may not be there from here on, but the likely rise in the market is not expected,” Kant noted.Given this backdrop, he said his investment approach remains cautious with a selective focus on sectors that could benefit from domestic economic activity.
“So, we are very cautious on the market, only few sectors which we will be buying on declines and those are like banking is one space where we still feel there is a lot of scope out there, banking, infra, building materials, metals, and automobiles to a certain extent. Other than that just stay on the sidelines and watch how things unfold,” he added.
On the defence sector, Kant maintained a positive long-term outlook, even though stock price momentum has been uneven in the past year.
“See, what happens for defence companies is like we have been bullish on this sector for last two years, though last one year has not been good on the stock price front, but the momentum as far as the order inflows was there is still there. I mean, there is a continuity of order intake coming in and the run rate of execution of say 12% to 15% that is a feasible run rate which is doable for defence companies, they have been doing that,” he said.
However, he explained that companies involved in large defence manufacturing projects naturally have longer execution timelines.
“Except BEL because it is more of a day-to-day supply kind of a company, so their execution is much faster, but say Mazagon Dock or Cochin Shipyard or for example HAL they are building ships and aircrafts, combat helicopters which takes time. It is not that in one or two quarter the delivery can be there,” he added.
Kant emphasised that the structural opportunity in the defence sector remains intact, supported by strong order books and increasing localisation of manufacturing.
“So, long-term we are very bullish on that. I mean, the order book itself is 4.5x to 5x of the bill ratio and the margins have been improving because more of the input is being now manufactured in India. So, the make in India concept, almost 60% of the components going two years down the line will be manufactured in India. So that is a thematic structural play,” he said.
He suggested that investors should accumulate quality defence names during corrections rather than chasing rallies.
“So, the strategy is wherever there is a decline because of any adverse reporting by few brokerages or anything like that or one or two bad quarters you should buy there, do not buy it on the rally, and the top pick still remains BEL and HAL and Mazagon Dock. So, these are three counters where we think if you are holder for two to three years very good prospects out there and it is a solid counter because these orders will get executed and the numbers on the P&L will be there for you to see,” Kant said.
When asked about portfolio positioning amid shifting global trade dynamics, Kant said his strategy has always been tilted towards domestic demand rather than export-driven opportunities.
“We were always domestic facing. We have never tilted our portfolio based on FTAs being signed because it has been signed. It is one year more is there for things, the fine print to come out and how it is being negotiated and Europe is a very tough country to trade with because there are so many environmental norms and other human rights norms are there to adhere to that,” he explained.
He added that compliance challenges and evolving global tariff structures make export-oriented bets uncertain in the near term.
“And now since tariff of US is again subject to every day change, every three or four days it has been changing so 25%, 15%, 10%, now again they are saying 15% and then five months down the line it will go up. So, this is one theme which you should totally ignore and avoid,” he said.
Instead, Kant believes investors should focus on sectors closely tied to India’s domestic growth story.
“But the safest is inward facing domestic economy and there we think the infra space will continue to do well. The cement will continue to do well. Metals, the domestic manufacturers will be having a business at their hand. At the same time because banking is a proxy to all, it will be garnering business,” he said.
However, he advised caution on non-banking financial companies due to the possibility of interest rates staying higher for longer.
“The only thing which we now think should be avoided to a certain extent is the NBFC space because interest rate down cycle is likely to be paused at least for this year in light of what is happening and inflation may pick up going forward. So, there will be some cost of funds being hiked up for the NBFC space, not for the banking space because they are largely deposit-led liability side, so they would be better off,” Kant added.
Overall, he remains constructive on sectors linked to India’s structural growth themes.
“So, the very basic structural economy facing sectors is what we are bullish on. Automobiles you still buy on declines,” he said.
