market rally: Which sectors of the market still offer value for investors? Abhay Agarwal answers

“They are still at about 20 times FY26 earnings at the index level. So, I would not call it that this valuation is so far stretched that there are no opportunities. At the same time, are the valuations at a level that you can say with a lot of certainty that anything you buy will make you money? I do not think we are there also,” says Abhay Agarwal, Piper Serica.

Given the fact that we are hitting fresh record high now on the markets once again, do you believe that the market valuations is now looking a bit stretched or do you think that it is not that expensive yet?
Abhay Agarwal: If we look at by traditional standards, the valuations are definitely on the higher side. I do not think the valuations or the index, when we look at valuation, we typically talk about the valuation of the Nifty Index stocks, the 50 stocks. So, they are not in the exorbitant range yet. They are still at about 20 times FY26 earnings at the index level. So, I would not call it that this valuation is so far stretched that there are no opportunities. At the same time, are the valuations at a level that you can say with a lot of certainty that anything you buy will make you money? I do not think we are there also.

I think we are somewhere between fair value and expensive zone. So, investors will have to do a lot more work right now to make money in the sense that they cannot just look at index stocks or they can only look at index funds, but they have to become a little more active and look for opportunities that are not part of the index stocks or not part of the flavour of the month stocks to make money.

So, I think there are still opportunities if we look away from the broad market valuation, but investors will need to work to find those opportunities now. So, let us make it easier for our investors and our viewers then. So, where do you think the pocket of opportunity lies in the market? Like you said, you need to look away from stocks that are primarily in the index but look at stocks that can offer value. Which pocket of the market do you think the value lies right now then?
Abhay Agarwal: I will talk about us and what we have been doing at Piper Serica. So, our approach is to look for opportunities that are not very popular right now. Some of the sector segments that have probably disappointed the market for some time and have gone through a sideways time correction. But get in at a time when that sideways time correction seems to be getting over because two things have happened, either the industry has hit a bottom and is now recovering or the valuations have become more attractive. So, three of the sectors that we are fairly bullish on now are number one is insurance and that includes both life insurance, private players in life insurance, health insurance, and general insurance. So, not a buy recommendation, but since our model portfolio is pretty well known, so we have three names in our portfolio that are part of this group. One is ICICI Lombard, ICICI Pru, and Star Health. These stocks have already done well for us, but I think looking at the long-term opportunity that India presents for insurance players, there is a long way to go. The second space that we have been fairly active in and have placed our bets already is agrochemical space. Again, a sector that has disappointed the markets because of flattish earnings for a very long period of time, a lot of pressure from China dumping, poor pricing, no pricing power. But that seems to be changing now slowly, but it is changing as the dumping from China has reduced and some of these companies are seeing some pricing power come back.

And the third sector, again, that we are fairly bullish on now is the pharmaceutical space. We have been investing in it since the beginning of the year in the largecaps and we are seeing some good returns already. I think investors get too focused on the short-term valuations in the pharma stocks, but if investors look beyond FY26 earnings, then they will find that these largecap pharma stocks in India, like Divi’s and Dr Reddy’s offer tremendous opportunity for long-term value creation. So, I think these are the three sectors where we are seeing attractive opportunities right now.

But what is even interesting is the fact when I look at the sectors that you are not too positive on and that would be banks, NBFCs and IT, what was the rationale for that? And also, I will dig in deeper for the IT sector because for the last few trading sessions, we have seen a good up-move in the IT sector. People are of the view that now that you may have a rate-cut cycle starting at the United States or hoping that it actually takes place, the scenario for BFSI segment would look better in the United States, will aid the IT sector. So, what is your take – one, on the banking space, why is that in the underweight stance for you?
Abhay Agarwal: Yes, I would say it is a bit of a brave call for us, but it is coming from the data that we are seeing at the grassroots level. We are seeing three things happening. For the lenders, I would club that segment as lenders, which includes large banks, small regional banks and NBFCs. We are seeing three things happen. One is that the cost of deposits is going up. So, first of all, it is difficult to get deposits, even for large banks with large branch presence that used to drive deposits. They are not as easy to come by. So, what is happening is that the cost of capital is going up for these banks.

The second thing that is happening is that there is an increase in cost-to-income ratio, and that is driven by higher rents, higher operating costs, higher salaries. And the third thing is that there is a deterioration in asset quality, especially in the unsecured loan books. If you look at loan books, some of these credit card players and personal loan providers, plus also microfinance companies, there is a clear deterioration in the asset quality.

It is not alarming yet, but the trend is not good. Now, some of it is being explained as a seasonal phenomena because of the elections and heatwave in the last quarter, but we believe that it is far more sticky. There is stress at the grassroots level as far as repayment is concerned, as far as ability to pay on time is concerned.

And we would like to see the collection efficiency especially improve over the next couple of quarters to build a more positive view. But with these three things happening, it is creating a bit of a vicious cycle for lenders right now. And in an environment where Indian banks and Indian NBFCs already trade at probably the highest book value multiples in the whole world, I think investors will soon ask the question that if these banks are going to grow now in a single digit, then are those valuations justified?

I think we have a very positive long-term perspective on this segment because it is very critical for GDP growth. But in the short term, we are being very cautious. We want to see the matrix improve before we get back into this segment.

The IT sector actually is something that we have been watching out for very closely, is not it? Like, we have been talking about it. What sort of indication are you getting with these IT companies? You do not seem to be enthused at all.
Abhay Agarwal: I think, again, a very large sector and it is a very valuable sector of the Indian economy that has created jobs, that has driven the economy for a long period of time.

I think this is a segment now which is getting into consolidation phase. And I think some of these guys may benefit from the short-term boost that may come in.

I do not believe that simple logic that just because of rate cuts, banks will suddenly start spending on, open up their IT budgets. You have to look at US banks. They are under tremendous margin pressure. They are being told to cut costs. And a lot of the work structurally is moving towards AI and generative AI, where cost of doing a project for large IT companies should come down, but it is not coming down.

So, I am a little worried right now that the Indian IT industry and this is their own guidance, it is not something that we are deducing. But even if we go by the guidance that large Indian IT companies have given, they are talking about a 0% to 3% top-line growth at best over the next year. Now, with that kind of growth, I do not see why should we as investors be willing to pay a 25 to 30 times forward PE multiple for a company where the management itself is guiding for a very flat growth, no growth, or minimal growth. So that is my problem, that these stocks may seem defensive.

They may seem value stocks. But as fund managers, if we buy them, we may just go without making any return on them for a year or so. So, again, I would like to see some positive triggers develop here. I would like to see the management commentary improve when they talk about quarterly results to make a bet again on these stocks.