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Indian equities are overvalued as earnings grow slower than expected and a relentless supply of shares from large initial public offerings and stake sales by promoters soak up liquidity, according to Rajeev Thakkar, Chief Investment Officer at PPFAS Mutual Fund.
Thakkar, whose flagship Flexi Cap fund is India’s biggest, is holding about 20% of the roughly $10 billion assets in cash. And he is in no hurry to deploy it.
“Valuations are still expensive and even if the market corrects another 10%, you won’t be getting many quality names at a reasonable price,” Thakkar said in an interview in Mumbai.
The benchmark NSE Nifty 50 Index trades at a one-year forward price-earnings ratio of 19.8 times. The gauge slid into correction territory earlier this month amid large foreign investor outflows, but its valuation is still among the world’s most expensive.
Thakkar has a history of maintaining a large cash allocation, even in a booming market. Notably, during the 2017 bull run, up to 30% of the fund’s assets were held in cash.
Quarterly results of many large companies and some notable midcap names fell short of analyst estimates, prompting a flurry of earnings downgrades. Reliance Industries Ltd., Avenue Supermarts Ltd., Maruti Suzuki India Ltd., Asian Paints Ltd., and Bajaj Auto Ltd. were among Nifty members that posted disappointing numbers amid a consumption slump across many sectors of the economy.
The flagship Flexi Cap fund held HDFC Bank Ltd., Bajaj Holdings Ltd., Power Grid Corp., Coal India Ltd. and ITC Ltd. among its top holdings. It has returned 23% so far in 2024, more than double the Nifty’s rise.
“The India growth story is intact, but there is too much competition in almost every sector,” Thakkar said. “Both incumbents and challengers will find it hard to make money till there is some consolidation.”
And even if consumption rebounds, the recovery may not be a broad-based one.
“Within the consumer space, different segments will do well at different points because household income is limited,” Thakkar said. “For instance, if home sales are strong, it is possible that many people who have bought houses on EMIs will cut back on travel.”
--With assistance from Alex Gabriel Simon.
(Updates with fund’s size in second paragraph.)
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