Responding to a query on whether the recent bounce signals a turning point, Dalal said, “So, the last time we spoke around, I did mention to you that we were starting to deploy some amount of capital in smaller lots into the equity markets because we thought the war would end soon.” However, that optimism has since faded as the conflict drags on longer than expected.
He added, “Unfortunately, that does not seem to be the case and the more it is prolonging and the more it is going on, the delay in the returns for Indian equity because Indian corporates earnings will take a hit is getting longer.”
Pause on Fresh Investments
Dalal revealed that his strategy has shifted significantly over the past week. “So, we have actually over the last one week taken a call not to put in any more fresh capital at this point of time. We are going to keep watching the market.”
The concern stems largely from the risk of escalating tensions impacting global energy markets. According to Dalal, “We think if this continues and if Donald Trump goes on and keeps hitting the infra there, Iran is going to hit back in the GCC just as hard because obviously he cannot reach the US and that is going to keep oil prices elevated for much-much longer than we would have liked.”With refining capacities already hit in parts of the Gulf, supply disruptions are beginning to ripple across industries. “So, either these companies pass on the increase which leads to a massive inflationary pressure or they take a hit in margins and if they take a hit in margins, it means earnings goes down and then the valuation start looking even more expensive. So, either way it is showing up as a bit of a negative,” he explained.MSME Stress and Banking RisksThe impact is not limited to large corporates. Dalal flagged rising stress among MSMEs due to inventory shortages and tight cash flows. “Now, when you have a situation like that and you have debt on your balance sheet, it kind of puts you in a very bad position.”
He warned that if disruptions persist, the stress could spill over into the banking system. “What you are going to see is NPAs rising in the banks… for me, going forward bank NPAs could become a bit of a problem, a bit of a challenge.”
Despite recent strong banking numbers, Dalal cautioned against complacency. “That is like driving your car looking in the rearview mirror and not looking forward.”
Markets May See Further DownsideGiven the evolving risks, Dalal remains cautious on the near-term trajectory of equities. “My view right now has become kind of wait on the sidelines for a little bit longer… if it does not end, I see the markets down another 10% from here.”
Earnings Outlook: Strength Now, Weakness Ahead
While the March quarter may not reflect the full impact of current disruptions, Dalal believes the real stress will emerge in the coming quarters.
“Q4 earnings is not going to be a problem at all… the impact and the effects… are all going to start playing out in Q1.”
He added, “Markets are forward looking and for me the bigger problem… is Q1 numbers are going to be very-very subdued.”
Rising input costs and supply constraints could compress margins across sectors. “You are going to see volume disruption for many companies… then you are going to see inflation… Q1 numbers are going to be very weak or inflation is going to see a massive-massive jump.”
Inflation and Policy Risks LoomDalal also highlighted the broader macro risks, particularly from rising crude prices. “If crude prices stay higher… what stops the government from saying that look we need to increase prices by Rs 20 a litre in petrol and maybe Rs 25 a litre in diesel.”
Such a move, he warned, would have cascading effects. “What kind of impact is that going to have on the entire logistics market which pushes inflation up across the board for every product in the country.”
Consumption: Defensive vs Discretionary DivideOn the consumption front, Dalal drew a clear distinction between essential and discretionary spending.
“When you talk about a Jubilant FoodWorks and a Tata Consumer, they are two ends of a spectrum because one is kind of a FMCG product, the other is a discretionary product.”
He noted that essentials continue to hold up better. “Obviously FMCG is showing decent numbers because at the end of the day that is something that is essential.”
However, discretionary demand remains vulnerable. “People can start curtailing their discretionary spends… you are beginning to see cuts in people’s spending because your inflationary pressures are coming through.”
Even so, Dalal remains structurally positive over the long term. “We believe this is a very underpenetrated market, huge room to grow for a lot of these companies.”
Limited Upside, Risks PersistDespite significant corrections in consumer stocks, Dalal does not see immediate upside triggers. “For the time being these stocks are not going to see a major upside… otherwise yes, all bets off and all these stocks could fall also another 10% or 15% from here.”
Pricing Power Still UncertainOn the question of whether companies can pass on rising input costs, Dalal suggested a wait-and-watch approach.
“It is not necessary that they pass on the price escalation right away because everyone is still very hopeful that this war will end soon.”
However, prolonged disruption could force their hand. “If this persists, yes, they are going to have to increase prices.”
Outlook Hinges on GeopoliticsUltimately, Dalal underscored that the market’s direction hinges heavily on how the geopolitical situation evolves.
“It is very difficult for me to say what is going to happen over the next month… the issue becomes how soon can things stabilise and that to me is looking now very difficult to call.”
For now, the message to investors is clear that the apparent calm in markets may be deceptive, and patience could prove to be the most valuable strategy in uncertain times.
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