Devarsh Vakil of HDFC Securities sees value emerging after markets factored worst of newsflow

Added: 2026-05-20

[00:00:00]We have uh Dvash Wakil who's the head of prime research at HDFC securities joining us. Dvash good morning so good to have you and of course some bit of a recovery we have been uh seeing on the markets but yes sir oil prices still above that $100 per barrel and that's a key negative for India. What's your take and of course what's your first thoughts on markets and of course the what lies ahead.

[00:00:22]>> Right. So thank you first of all for having me on the show. It's pleasure to be here. uh incrementally uh markets look at the incremental news flow and I think uh what you have mentioned that the higher crude oil prices or the higher inflation leading to higher uh treasury yield higher cost of capital is more or less now discounted unless we see some more deterioration on the geopolitical front uh or hit on the sentiment I think markets have digested these negatives in the current prices.

[00:00:53]So yes uh uh what happened uh recently that the um there was imminent attack on Iran that has been put off because Donald Trump has tweeted or put on truth social net uh he's hoping for a lasting piece. So I think that is rubbing off on the uh prices for now and what I have mentioned the uh negatives are discounted in the prices long-term story is still intact and I think that is uh where the value investors or the institutions are now trying to increase the allocation towards equity and that's what we are seeing in the markets.

[00:01:28]>> Got it. Got it. But you know Dash at a time when we are seeing that uh the you know inflation risks have once again emerged. You're seeing that rupee has been hitting record low day after day and even inflation concerns are back on the dial. What's your take? I mean how are you convincing clients to approach equities at this point of time? How are you convincing them to look at at the larger picture when it comes to uh you know in the perspective of two to three year time horizon.

[00:01:55]>> Yeah. So as you mentioned the news flow is negative uh and it is widespread but as experience has taught us that the goods good prices and good news never come together right now because of the negative news flow we have some of the stocks and sectors available at attractive valuation and that's where uh if we have faith in long-term India story then these are the times where you should try to allocate more towards equity through your as per or a sector location and as per uh the risk you can take systematic investment plans are a great way to put capital to work and we are uh conveying this facts to our customers and customers are uh increasing the location towards equity see the longerterm story as we know we are still the fastest growing economy obviously government has done some uh steps to cushion our economy from the geopolitical concerns from the higher energy prices and they will do more um as uh early as today also we've seen that the uh fuel prices have been increased to soften the blow towards the balance sheet of the OMC companies and if crude oil prices were to move higher I think there will be more steps but uh uh the other positives are that the trade agreements which India did with UK with EU with Australia those will start kicking in we are in a final stages of negotiation with US the infrastructure momentum is there um we are getting there was a news flow that we are again going to get some crude oil from Russia.

[00:03:29]So incrementally I think the negatives are more or less discounted in the current prices and investors start nibbling in the markets at these levels.

[00:03:38]>> Got it. Dash we have seen that the oil price the fuel prices have once again been hiked for the second time in the last 5 days itself. We've seen that petroleum prices have been hiked by about 89 pesa diesel prices by about 91 pes. But still the market seems to be not convinced. I mean how would you approach all of these OMC counters in the context of higher crude oil prices and what is the ideal fuel price hike that you are also envisaging for all of these uh OMC companies to compensate their losses?

[00:04:09]So uh there is still substantial uh under recoveries are there in the um oil marketing companies. But what I expect government will do is that uh now on incrementally uh there will be idiotic revisions not like what we had last revision took many years to come and then we saw that within a week we have seen one more hike. So if crude oil prices were to move substantially higher from here again there will be hikes to cushion the blow to the government's balance sheet but if crude oil were to go down government will keep a strategy of keeping the oil prices or the at the at the pump prices stable and thereby um helping the uh oil marketing company to recover more. So I think that would be the strategy government would employ for their own and that should uh the negatives or the under recoveries are already uh uh there in the prices. The companies have announced results and they have announced the end recovery. So I think these are uh good levels where uh incrementally they may not fall. uh I'm not allocating or uh recommending overweight there because there are other opportunities in the financial side on the commodity side uh where we see more opportunity for investors to gain. So um I think they will these prices they will stabilize in the oil marketing competition.

[00:05:36]>> Okay. All right. All right. From uh you know for FI27 what is the kind of you know earnings cuts that you're seeing in terms of all of these OMC companies? Are you looking at it you know through the lens of uh totally being on the sideways and you know it's a complete avoid position from your end?

[00:05:54]Okay, >> we were quite cautious on them. But u if we were to see the future and if we were to see that this hostility on the Russia Ukraine side, hostility on the Middle East were to come down then there will be a theme where all the uh companies whether it is oil marketing company, whether it is aviation company, companies which are actually impacted because of the war when the incremental news flow turns positive, they are the they will be the one who will the be the beneficiary In order to play this theme, we have come out with a basket uh and named it as a bounceback theme where as in when the war comes to an over a halt or or the permanent ceasefire is there the these are the few companies who are likely to benefit the most and we have done a study that historically as and when the uh hostility comes to end. If you were to take a view of 3 month, 6 month, 9 months, the sectors which are impacted most are the one which are likely to gain. So I think this is a time where you should start uh playing this bounceback theme and uh start allocating capital towards uh affected sectors. So no I'm not uh recommending avoid on all marketing company. In fact gradually we should incrementally add exposure as the prices come down in these stocks. I think worst is behind us.

[00:07:21]>> Okay, got it. The worst could be behind us. That's the key takeaway. Uh D they were you know let's shift back focus to all of these IT stocks. It's seeing relief for the you know another day as well on the back of the depreciation in rupee but of course the AI risks remain.

[00:07:34]I mean would you see this as a key headwind at a time when all of these IT stocks have remained depressed in low singledigit growth. uh do you see uh you know uh the the depreciation in rupee to act some kind of a headwind to uh you know tailwind to all of these IT companies?

[00:07:52]So longer term as you said the business model all of all these large IT companies will move from the manas to effort based to outcome based and I think that's where a market is recognizing and that's why we have seen a severe derating of all these companies large IT companies will have to uh restructure their business that's why um longer term we are still not overwork on them although So technically in a extremely short term for next few weeks to quarter uh they have also come down to a very attractive level where we have turned positive on them and we see a bounce for next uh uh quarter or so in these companies from depressed levels.

[00:08:39]the alpha or the opportunity which is there in the midcap and small cap which are relatively nimble smaller companies which are able to easily change their business model to suit to suit the uh change realities. So I think there is money to be made in smaller midcap and small cap IT companies who are able to uh work on deployment of AI implementation of these projects and change their business model on the go.

[00:09:06]So there we find more opportunities but I'm not uh negative on large cap ID companies. I think there is a bounce expected for next uh few weeks to a quarter there where uh we may see uh high singledigit uh low double digit gains in these IT companies as well.

[00:09:25]>> H okay got it your key takeaways from the March quarter performance that we've had and of course any management guidance that's uh pointing out to Q1.

[00:09:34]How are you positioned there?

[00:09:37]>> So um as we know there are um on the macro side because of the various Asia conflict and the all price shock uh there are companies whose margins were under pressure but uh looking at uh the overall growth uh the larger companies are able to deliver about 10% kind of a growth which was uh as per market expectation. Smaller and midcap companies on aggregate have been able to generate 20% kind of a growth. So uh the longerterm story seems to be intact. We are looking at around 12% kind of aggregate earning 12 to 14% kind of aggregate earning for FI27 and that will also get repeated in FY28. So uh looking ahead this uh and factoring in what has already uh been uh done in the damage to the prices it looks like that we are looking at relatively better uh ahead FI27 compared to FI26 compared to small 5 6% growth we will see higher growth on the aggregate side valuation which were around 22 times has come down to 17 18 times so higher growth and lower valuations paves way for recovery in the markets going ahead.

[00:10:51]>> Okay, got it. Dash, we have seen that you know a lot of you know the broader markets have picked up pace beat your midcaps and small caps. Last month also we have seen a stellar outperformance from both the sectoral pockets. Uh I mean how are you placed here? I mean in terms of earnings growth how was Q4 uh if we have to segregate in terms of market cap, large cap, midcap and small cap and of course what's the way ahead that you're looking for?

[00:11:15]So um we are finding opportunities across the market cap. Uh it is a time where uh within the sector also there are opportunities uh whether it is small cap large cap. So I am more of a sector of agnostic uh market cap agnostic uh uh strategy we are recommending. We are asking investors to look at individual stock bottom up stock picking and there are enough and more opportunities across various sectors available. Uh last year where compared to this year last year we were actually cautious on midcap and small cap and last 12 to 18 months we have seen that the brutal correction has already happened in many midcap small cap and we seems to have bottomed out around March. We have seen a fantastic recovery in April and in the last few weeks we've seen that there is some bit of a pullback. I think this pullback is an opportunity where if you find that the quality of the balance sheet and equality of the management is good enough, valuations are attractive enough, I think you should start deploying capital in these those kind of stocks. um private sector banks uh commodities uh NBFCs these are the areas where I see good growth happening in FI27 and rises seems like today okay got it got it in an environment like this uh Dash anywhere that you're finding good value and growth visibility and relatively safer valuations I know it's tough to crack but still I mean uh what are you looking at uh in terms of attractive appeal for the time Okay.

[00:12:49]>> So as I just mentioned uh financials look uh good to us. Uh >> private sector banks are offering us opportunity. The balance sheets are uh relatively cleaner. They have growth capital and opportunity to lend is there because of the higher energy prices.

[00:13:09]there is uh higher requirement for working capital across corporates and I think these large banks will be able to supply that capital as they have capital adequacy on their balance sheet. So they should be able to grow and valuations are attractive. So private sector banks look attractive to us. Many of the uh exporters whether it is in the pharmaceutical side or metap IT stocks or metal stocks because of rupee depreciation they will have margin tailwinds with them and there also we are finding opportunities. So um commodities cyclical sectors uh power uh paper metals uh private sector banks select NBFCs non- lending NBFCs in the financials uh the exchanges and commodities side these are the areas where we are finding opportunities.

[00:14:01]>> Mhm. Okay. Got it. Dash what about farmer? How are you placed there? We have seen a recent outperformance uh from the pharma index and not just pharma of course on the defensive plays uh beat you beat your FMCG particularly for consumer staples as well we've seen decent numbers which came out from Nestle Hel are you placed here going ahead >> so we are finding opportunities there um right >> some of these black pharmaceutical companies are also beneficiary of uh the GLP1 opportunity to export as it has gone of patent uh domestic markets are opening and I think there is going to be big opportunity there in bio similars as well. Uh there are opportunities in the uh exporting to US the generic prices deterioration has stabilized u large companies like sunarma have acquired bigger players and now becoming a global plant. So those companies are going to be in a reckoning going ahead. So we are finding opportunities across uh midcare and small cap pharmaceutical sectors uh for investors. On the consumer side we have been uh negative on FMG for the last two years uh because of the concerns of the uh higher valuation and lower growth uh stocks have underperformed and I think now uh some of the FMCG stocks are showing signs.

[00:15:24]Recently we issued one report on Tata consumer where they have seen 14% kind of a volume growth and these are the numbers which encourages us to put an investment buy on them. So um large secret companies uh uh companies like Nash good consumer in the past we have uh started recommending them as a long-term investment bias for our investors.

[00:15:48]H okay got it got it dash you know we have seen that rupee has depreciated every day there's always a a record low which we have achieved uh for the time being at so far this year it has depreciated by about 7%. As an institutional arm how worried are you uh you know for the rupee to touch about that $100 per barrel I know it's uh for now it's a less likely scenario but if you had to make a longarmed forecast I mean would you be worried about it?

[00:16:17]So actually we have strong forex reserves. If you see RBI has been using the forex reserve to push the blow. Um if from the top we have seen about 5% of our forex reserves being spent by RBI to defend the rupee. So they are using the higher forex reserve as a stock observer and letting the rupee find its uh the level which it should because of the higher oil prices and India being imported. It is natural that the currency will depreciate and we are seeing depreciation. I'm not unrely worried about it. Uh I think government is and especially NY is doing everything to to curtail the excessive volatility and excessive speculation. They have uh uh put limits for banks to keep open positions about $100 million. They have stopped non-delivable futures. So I don't think there is excessive worry about that. uh excessive speculation has been cut and RBI has enough uh and more to defend rupee. So I think rupee will find its uh naturally but obviously it all depends upon how the geopolitics play out. the current prices do discount that the volatility or the uh hostility which we have seen in the Middle East is uh awaiting and if uh we were to have a a permanent ceasefire I think these are the uh levels where it will find uh its natural level.

[00:17:44]>> Okay. Got it. Got it. Dash you know you pointed out several sectors where you remain quite positive on be it your capital goods power defense um on the sidelines anything that you're cautious uh where you find uh uh the valuations to rich and of course the riskreward not favorable.

[00:18:01]>> So within these sectors as you mentioned there are power companies which are extremely uh expensive and there they are discounting very high growth where investors needs to be cautious.

[00:18:12]Similarly, there are defense companies where we see lot of uh uh large order book and over the next couple of years once the execution kicks in the earnings will look attractive. So as I mentioned during the show uh across the board within these sectors also you will find stocks which are attractively valued where stocks are also expensive. So across the board I don't see we had lot of froth in the system. A lot of midcap and small cap were quite overvalued but we have already seen correction. So I don't see across the board any sector which is extremely overvalued. There are pockets within the sectors where we need to be cautious and there are opportunities within these sector. Um some sectors like uh FMCG uh electronic manufacturing sector defense capital goods were trading at a much higher valuation and now we have seen correction. So I don't see uh unduly I'm not unduly worried I don't see any uh large froth across the industry across the market. In fact these are the times where you if you work hard and if you find opportunities there are uh enough and more opportunities in the market to deploy capital.

[00:19:27]>> Okay. Got it. Got it. All right. With that we have to let you go Dash. But you know good conversation like always and thank you so much for joining us.

[00:19:35]appreciate your time and looking forward for more such conversations.

[00:19:38]>> Okay. Thank you for having me. Uh it's pleasure to be here.