market: Any big market correction unlikely; large pool of foreign money waiting on sidelines: Mahesh Nandurkar

“The absolute numbers are good. The relative positioning is looking even better with 6.5-7% GDP growth outlook, 12% to 14% corporate EPS growth outlook and that too over a long period of time. So, investors, have really kind of shown a lot of interest, which kind of shows in the numbers that we have been able to pull,” says Mahesh Nandurkar, Jefferies.

What is the big understanding of how things are shaping up for the economy and for India Inc? Based on your interactions, both on the record, off the record, inside the conference room, outside the conference room, how is the growth and the earnings picture stacked up?
Mahesh Nandurkar: So, I believe that the economic outlook for India is definitely fantastic and the reason why we have that confidence and continue to get that confidence reinforced is when you look at the investment activities in the economy, the fixed capital formation is rising, and it is always investments driven growth is more sustainable, investors like it, it broad bases the market, creates more options and opportunities.And also, in the context of what is happening globally where we are seeing growth in China being quite weak, the US is slowing down, and there is some probability now that is getting assigned to the US recession as well and that is why the Fed is cutting and so on. So, in all that context, the relative position of India is looking even better.

The absolute numbers are good. The relative positioning is looking even better with 6.5-7% GDP growth outlook, 12% to 14% corporate EPS growth outlook and that too over a long period of time. So, investors, have really kind of shown a lot of interest, which kind of shows in the numbers that we have been able to pull.

We got investor participation from 20 different countries, which is the widest participation that we have ever received. So that goes to show the foreign investor interest.
If one really looks at last two quarters, we have seen not too many big upgrades, couple of downgrades, and in general markets have not seen any big earning surprise. Are we in for more of the same? Based on your interaction with companies and your understanding of demand and growth dynamics, we could be in for perhaps two or three lull and dull quarters of earnings.
Mahesh Nandurkar: That is quite possible because we have had a very strong growth over the last couple of years. This year, yes, we have seen some earnings revisions on the downside. And the June quarter, the attribution that was given to was the election related activities and hot summer, etc. This quarter, it seems like the rains that have been higher than last year have had some impact. So, there are a couple of reasons like that. But the end result is that probably we are going to be seeing some earnings revisions on the downside. But having said that, the growth numbers are still looking reasonably good. The key question here is that when we talk about the growth outlook being good and relative positioning being strong, etc, how much of that is already factored by the market? My sense is that the strong surge in the domestic liquidity has made the markets quickly factor in the growth outlook that we are kind of talking about. So, maybe a couple of quarters, two-three quarters of market moving sideways or maybe a small dip, etc, is quite likely and if that were to happen, I would actually take it as a healthy time correction because the earnings growth, as I mentioned, is about 14% or so.

So, even the market remains flattish for the next one year, the valuations improved by 14%, which would then begin to look more attractive.

The bedrock on which markets are going up is this insatiable appetite for equities, whether it is retail, HNI, or even global investors. But in your recent strategy note, which is 13th of September 2024, the observation what you are making and what you essentially are making a case is that unsustainable demand flows a challenge, which means are you making a case that the kind of liquidity which is coming from domestic investors and domestic participants into Indian stocks will not sustain?
Mahesh Nandurkar: See, if you look at just the macro numbers, in this current calendar year 2024, for eight months for which we have the data for, the average domestic inflows into equity markets been at $7.5 billion a month.
The good part is a dominant part of that is coming in by way of mutual fund flows. But still, the absolute number of $7.5 billion is huge. If you were to annualise that we are looking at $90 billion per year kind of an inflows and that accounts for about 25% of gross financial savings, about 35% of net financial savings.

Now, these kind of percentages 25% or 35% is something that we see in developed world. So, clearly, to that extent I believe that the flows that we are seeing are at an unsustainably high level and there is a good possibility that we trend down towards a more sustainable number, say around $4 to $5 billion.

So, yes, I am making a point here that the domestic flows at the current pace appear unsustainably high.

If your thesis turns out to be a reality, then what happens to the market demand-supply dynamics, because one side IPOs are simply going higher and higher and if flows are unlikely to sustain could we then be in for a demand-supply mismatch, it could be technical in nature, but are we headed there?
Mahesh Nandurkar: See, the technical nature or the short-term nature while that can unfold, but at the same time, we also have to keep in mind the foreign investor positioning on India, which is at the lightest level that we have seen in the last 10 years or last 15 years or so and that is also because the neutral weight of India has gone up quite a lot and several of the foreign investors have not been able to keep pace with the new stocks, the new sectors being added and they are looking at opportunities to buy the market on any potential dip and that is clearly the feedback that we get from interacting with a whole bunch of investors.

So, my sense is that while there could be some toning down of domestic flows over the next few months, but any big market correction still looks unlikely to me because there is a large pool of foreign money also waiting at the sidelines.