Focus on bottom-up stock selection over passive strategies: Expert view

"You need to go bottom-up, do hard work right now, select good promoters, management teams with good balance sheet, now the sky is open for Indian entrepreneurs if they can execute, they can grow very fast and they can surprise the Street," says Pankaj Tibrewal, IKIGAI Asset Managers.

What a summer it is turning out to be. First, there were only cloudy skies in the month of April, now sun is shining bright. Have we seen two extremes between April and May now and you think somewhere we will settle in between?
Pankaj Tibrewal: If you remember our last conversation in April when everything was looking murkier, I said that the top-down macro has started to improve and macros have bottomed out and incrementally things are looking better. And what were those things?

One, oil prices coming down and do not forget every $10 barrel of oil decline is 30 to 40 basis points of GDP incremental growth. Second was that cost of funds and liquidity both this year will be much better than last year, and we have seen how RBI has pivoted itself from a deficit of 3.5 lakh crores in system last January to now a surplus of about 1.5 lakh crores.
So, clearly, this kind of a pivoting in by RBI I have not seen ex of GFC and COVID. So, all credit to RBI for doing this and cost of funds, you have seen 50 basis points of decline and more to follow in the next 12 months.

The third most important point is that the flow side and as we speak to more large asset allocators who are not bothered about weekly, monthly fluctuations, they are getting concerned by their investments in US and incrementally we sense after speaking to them that they want to diversify a part of their US exposure to the rest of the world.

Obviously, they do not have a strong handle on India. So, they are speaking to us, learning about it. But my view still remains that we will be positively surprised on the flow side which comes to India in this calendar year.

And yesterday, you saw how half a billion dollar in cash market and another half a billion to one billion in futures can move the market so violently within a very short span of time, so that is the power of flows and I think I am very positive and optimist on the FII flows going into the rest of the year.

Looking at the micro, I think after a quarter earnings estimate being cut very sharply, we have seen very decent breath of earnings this time being reported. According to us 75% of the earnings reported were either in line or beat the estimate.
Normally, this number is about between 60% to 65% and just to give you some number 316 companies out of Nifty 500 companies have reported till yesterday and the earnings reported pat growth is about 10% which is double digit, which is in my view not bad and actually it is the acceleration of the last three quarters.

Finally, money will follow where there is earnings growth, and our sense is that the first half setup is also looking very good because the base last year was quite low because in the first half nothing happened and last but not the least capex and consumption this year will be incrementally better than last year, and the operating word is better not amazing.
So, when you look at all these factors, markets have found a flow. However, one thing which is a little disturbing is that last two quarters, the divergence between the index return and the median return of the index has been very-very high.

So, just to give you some numbers in the fourth quarter which is January to March quarter, NSE 500 declined by about 4.5%, but the median return of the index was negative 11%, which means 7% kind of a divergence is huge and it means that few stocks in the index heavyweights are keeping the index higher, but the breadth of the market has been extremely narrow and this is something of a worry where we rewind back ourselves to 2018-19 where few stocks were holding on to index but the breadth was very bad and markets most of the people were complaining that their portfolio values are not going up in line with the index.

So, just keep that in mind and however, I believe it will be a stock pickers market over the next 12 months, individual stock will make you money rather than taking a broader call on any sector or market per se.


An example of where you think the market is undermining earnings recovery and give me an example where earnings are visible, but PE expansion could happen.
Pankaj Tibrewal: So, I believe that chemicals for example we have been positive for a while now. The restocking on agri side globally has been very-very strong and with the lag it will reflect on most of the chemical companies in India.
Inquiries have meaningfully picked up post the tariff issues and most of the agro and pharma majors know that they need to diversify a bit of their manufacturing and sourcing out of China and that if you speak to most of the chemical companies they are saying that inquiries are very-very high.

How much of that translates into businesses we will come to know over a period of time, but inquiries have picked up meaningfully. On the consumption side also things have started to come back. Few of the companies who reported on consumer discretionary space, we have seen very strong volume growth as well as margin expansion, that means that still the tax rate cuts started in April, but the momentum has started to get built across the consumer discretionary and second half of this fiscal year could be a space where consumer discretionary can start surprising us.

Whether it be retailing, whether it be consumer durables, kitchen appliances, and so on and so forth. These all sectors are trading at much lower PE than they used to previously because growth had slowed down and if growth comes back, markets can give them slightly higher multiples. And last but not the least, auto ancillaries.

Many of the auto ancillaries are transiting and pivoting themselves from being a pure auto to non-auto which will be about 30% to 40% of their business in next three to five years and that is a very-very meaningful change and whenever that happens, the PE multiples will see expansion and I visited personally many of the factories and I am surprised to see that how on the precision engineering side many of these auto anc companies are pivoting themselves to aerospace, defence, and semiconductor and I believe that that is a real opportunity for India over the next three-five years.

So, you need to go bottom-up, do hard work right now, select good promoters, management teams with good balance sheet, now the sky is open for Indian entrepreneurs if they can execute, they can grow very fast and they can surprise the street.