HDFC Securities’ Dhiraj Relli tells how to protect equity portfolio in case of any ‘U’ turn on D-Street

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Benchmark equity index BSE Sensex declined over 450 points in the early trade on Monday following subdued global cues. Asian stocks traded lower on concerns about the impact of elevated inflation and Covid-19 outbreaks on economic prospects. Is this a temporary blip or the going bull run will continue? In an interaction with Money9.com, Dhiraj Relli, MD and CEO, HDFC Securities tells what are the emerging risks in the domestic equity market and how investors can protect their portfolio in case of any sharp correction.

Edited excerpts

Do you think the ongoing momentum in the domestic equity market will continue? Which factors will support D-Street now?

Benchmark indices have touched new highs. Breadth and participation in the markets remain positive on most days. June quarter results announcements have begun and barring a few, most companies have reported good numbers and have guided for a better FY22. Institutional flows are mixed, but on an overall basis, they are still positive. Retail participation has risen and remains at elevated levels. Though there are fears about the impact of Covid-2 and a probable Covid-3 on the economy and listed corporates, we are seeing the organised listed players gaining market share vis-à-vis the unorganised players.

Also, the listed players have learned the art (though under pressure) of cutting costs across the board. All this has meant that the listed corporates have not suffered but quite a few of them would have benefitted out of the pandemic. The concerns of fiscal stress, Covid-3, asset quality stress and interest rate/inflation rise globally remains and the markets may react to these adversely at some point in future, but traders don’t want to get concerned in advance and investors do not want to sell early and repent.

Where do you see Sensex and Nifty by March 2022?

We do not project period end values for Nifty and Sensex. However as the economy is on a recovery path, we could see the indices rise over time with some intermittent corrections.

What is your view on midcaps and smallcaps? Do you think the ongoing rally will continue?

Small and midcap companies were under-owned and their rate of growth in revenues and profits from the FY20 base seems faster than most large caps. These companies have also realised the power of market cap and have undertaken measures like acquisition, demerger, sale of businesses, buybacks etc to enhance shareholder value.

Investors spend a lot of time and effort in identifying the small and midcaps that can turn into mid and large caps over the next 3-5 years so that they can earn alpha. It is also a fact that along with some key beneficiaries in each sector, a lot of their less deserving peers have also risen. Investors should hence do a review of their overall portfolio and particularly of their small and midcap portfolios to weed out such stocks and retain only the key beneficiaries. By doing this they will be able to right-size the number of their stock holdings.

How do you see FY22 earnings in case the third wave hit the market?

A lot would depend on the spread, intensity and duration of Covid-3. Indian listed corporates and even the states have now learnt to live with Covid. But if the third wave impacts consumption due to the impact on jobs and sentiments, then a greater impact would be seen on FY22 (and even FY23) earnings. This could further strain the already stressed fiscal situation. Also, the impact of this on international trade (that is already impacted by container shortage and rising freight rates) would be important to monitor.

How do you see Indian equity markets in terms of valuations?

By traditional methods of valuations, the Indian markets seem to be fairly or a little overvalued. However, this has to be seen in the background of low-interest rates and easy money floating around the globe, possibility of rise in Nifty EPS for the next 2-3 years after flat earnings between FY16-FY20, low allocation to equity markets in India (which is now on the way up) and lack of lucrative alternative investment opportunities.

It’s raining IPOs in the primary market. What are the factors one should look into while investing in an initial share sale?

Some of the points to be checked while evaluating an IPO includes the type of industry the company is in (whether the cyclical, commodity, defensive, new age, platform/network company etc.), the consistency in past growth of revenues and profits and its distribution policies, the other businesses of the promoters and their involvement in them, the uniqueness in the products and services sold, any technology edge due to own technology or borrowed from outside, the leverage ratio of the company, efficiency of working capital, the use of issue proceeds and the timing of their intended benefit, the promoters compliance record in the past, the competition scenario in the industry, the growth phase of the industry, the valuation of shares as compared to its peers.

What are the key risks do you see for Indian equity market?

Our markets face the global risks of monetary tightening and consequent unwinding of carry trade, geopolitical risks, commodity price rise affecting our balance of payment and fiscal deficit, recurrence of Covid-19 in some form or other over the next few quarters hindering the return to normalcy. Locally the risks include inflation remaining stickily high, interest rates rising to combat inflation and/or protect the currency, partial failure of monsoon and its impact on rural spend, the fiscal situation getting more precarious, asset quality getting worse and credit rating of India being considered for a downgrade etc.

How investors can protect their portfolio in case of any ‘U’ turn in the market?

Investors will have to be more selective from now onwards and move up the quality ladder. Penny stocks and stocks that are moving up on random tips or expectations without any visible improvement in performance are best avoided. If an investor’s asset allocation has tilted more towards equities due to the rally in equity markets, it may be time to reduce equity exposure by taking profits and restoring the originally planned allocation. They should follow money management rules. Evolved investors can also look at hedging their portfolio by buying Nifty puts (although this has costs).