A deluge of IPOs that we are currently witnessing is not a new phenomenon, and we have seen such scenarios play out when markets witness a strong bull run. While IPOs are an extremely important tool of capital formation in the economy, they tend to encash the euphoria in the public markets, says Mohit Khanna, fund manager at Purnartha One Strategy, in an exclusive interaction with Upstox.
However, when greed takes over, investors become complacent with their due diligence. We must not lose our focus on risk while we are making our efforts for return generation, Khanna adds.
Mohit Khanna has been associated with the markets for nearly 14 years. Khanna has covered multiple sectors as an equity analyst and has been part of the strategic fund management teams. Prior to joining Purnartha, Mohit worked with Banyan Capital and Future Generali Life Insurance (Mumbai). Currently, Khanna is the fund manager at Purnartha One Strategy.
Purnartha One is one of the investment strategies offered by Purnartha, a portfolio management services company in India.
Excerpts:
Equity market is hovering around record high levels, but it has been highly volatile. How do you see this? Tell us the top factors that are going to influence investor sentiment for the next six months.
Khanna: The current volatility in the market is the result of strong, continuous domestic inflows and unfavorable risk reward. The equity markets have done very well over the last two years and are now trading above their medium-term valuations, which creates downward pressure, and the liquidity on the other side moves quickly to buy any dip.
There are multiple global/domestic events lined up over the next few quarters: the impending start of the interest rate cut cycle, US presidential elections, assembly elections in five Indian states, 2QFY25 & 3QFY25 earnings release, and the Indian Union Budget for FY26.
Now, it's difficult to call out the impact of each event on the markets. However, it does indicate that the markets will continue to be volatile over the next few months.
What are your expectations from NIFTY50 Q2 earnings?
Khanna: The 1QFY25 earnings were impacted by a severe heatwave and two-month-long general elections. Over the analyst call, a lot of management teams indicated sequential improvement in the early days of the 2QFY25. This was largely due to some amount of the pent-up demand.
In certain pockets, the sequential recovery was faster, while multiple sectors have started to witness new order inflows and pick-up in execution only recently.
Additionally, strong monsoon has supported Kharif sowing well and has also led to higher water storage in the reservoirs for the upcoming Rabi season.
Considering these factors, I expect 2QFY25 earnings to be sequentially better. However, more important would be management commentary regarding the acceleration in the execution, or else there would be a risk to Nifty 50’s FY25 EPS estimates.
Tell us your overweight and underweight sectors and why.
Khanna: Overweight Positions
Capital Goods, Infra, Metals & Mining: The government spending on infrastructure building continues to remain strong. We have now seen some traction on the private capex as well. The trend is likely to continue as such projects have larger capital requirements and long build-out periods. Thus, it is a costly decision to abandon a capital expenditure plan midway.
IT, Healthcare: These are defensive plays, plus improvement in the fundamentals of the US banks due to lower interest rates (for IT) makes us bullish on the sectors.
Chemicals: Contra call. Exposure to selective companies that have completed their capacity expansion and value to be generated by increasing capacity utilisation.
Underweight Positions
Autos, Retail: After a strong recent run-up, valuations are unfavorable.
Consumer Durables: Heightened competition should have a negative impact on ROEs over the medium term.
What has been your investment strategy in the past 12–18 months? Please explain in detail.
Khanna: Over the past few quarters, the focus has been on lowering the risk in the portfolio while finding the stock ideas that show sustainable earnings growth over the next couple of years.
For example, a large part of the market has already run-up on a growing orderbook. So, execution capability has now taken the front seat in our analysis.
We are focusing on the companies that can deliver the products/services within the contracted timeframe. Therefore, while the large orderbook provides some comfort and visibility over the next couple of years, it’s the execution capability that will lead to sustainability of earnings growth.
As far as risk management is concerned, in the multi-asset Purnartha One strategy, I have reduced the equity exposure from ~85% to ~72% (my regulatory limit is minimum 70% exposure to equity as per the strategy’s disclosure documents filed with SEBI). Cash holdings have been increased to benefit from any potential opportunity that the market volatility will hopefully provide.
We have been witnessing a deluge of IPOs, both mainboard and SME, and record participation by retail investors. How do you see this trend? Is there anything that bothers you?
Khanna: This is not a new phenomenon, and we have seen such scenarios play out when markets are witnessing a strong bull run. While IPOs are an extremely important tool of capital formation in the economy, they tend to encash the euphoria in the public markets. Higher liquidity and investor participation are the biggest catalysts for an increasingly higher number of IPO launches.
What bothers me is the fact that when greed takes over, investors become complacent with their due diligence. We must not lose our focus on risk while we are making our efforts for return generation.
What are the most common queries/concerns you come across from your clients?
Khanna: Equity markets have delivered strong returns since the pandemic. A large part of the investor community is sitting on huge paper profits, which they now want to protect. The recent increase in market volatility has provided some amount of reality check.
Therefore, investors are now looking for more balanced multi-asset strategies to not only protect their profits but also lower the volatility of their overall portfolio.
What has been the investment trend in the last four years (since COVID)?
Khanna: Since COVID, the government has increased its expenditure by running large fiscal deficits. The focus area of the higher spending has been capacity generation in various sectors. This has benefitted the overall economy.
PLI has helped manufacturing-led companies, Pradhan Mantri Awas Yojana (PMAY) has helped building material companies, import substitution has helped defence-oriented companies, and so on.
In this backdrop, the consumer sector has lagged in its performance in the markets. I believe it is now the time for such consumer-oriented companies to take their fair share of the ongoing bull run.
What would you advise to investors who are entering markets for the first time?
Khanna: We must not lose our focus on risk while we are making our efforts for return generation. As the equity market valuations are seemingly stretched as of now, it is important to start with less volatile multi-asset strategies.
Give us an insight on how your products have performed over the years.
Khanna: We launched the Purnartha One strategy in September 2023, so we still have a year to complete. However, the time-weighted rate of return, or TWRR (absolute), has been 8.1% and 10.6% over the last three and six months as of August 31, 2024.
