Largecap valuations near fair value, time to start deploying: Jyotivardhan Jaipuria

"The reason we like the banks is they are very cheap. If you look at banks' average valuations over the last 10-year period and the average valuations today, banks is one of the only sectors which trade cheaper than what a 10-year average is," says Jyotivardhan Jaipuria, Founder & MD, Valentis Advisors.

Do you think the poison is out of the system and one should start deploying or this was just scratching the surface and there could be a lot more as far as downside is concerned on individual names from the broader markets?
Jyotivardhan Jaipuria: If we look at a very broad market, after quite some time, valuations are reaching what I would say, they are not cheap, but they are getting somewhere where you can say, okay, they are getting towards the top end of the fair value zone, especially for the largecap. So, if we just see the largecap universe, it is trading at close to 19 times one year forward now. And if we look at the 10-year average, it is around 18.3 times.

So, somewhere you are getting into a zone which is maybe not over the expensive at least and to that extent probably one should start nibbling a bit even if you do not want to put all your money in one shot, it is at least something where you want to nibble it and go ahead a bit.

The key is going to be the earnings growth. Is it going to come back? How quickly is it going to come back? And how sluggish is it going to be?

But help us with the sectors where one should start finding out the opportunities.
Jyotivardhan Jaipuria: So, there are some things and obviously ours is a philosophy which we call the three Us. So, we tend to look for stocks which are undervalued, but sectors which are under-owned and underperforming. So, one of the sectors which we are looking at is now the banking space.

The reason we like the banks is they are very cheap. If you look at banks' average valuations over the last 10-year period and the average valuations today, banks is one of the only sectors which trade cheaper than what a 10-year average is.

So, banks are cheap. And second is, at these valuations, a lot of bad news is priced in. So, as we see growth coming back, as we see things recovering, then I know banks is one sector which will do well.

The other sector which we like is pharmaceutical and that is something we have liked for like a year now. In pharma, one is we think it is like quite a secular growth story. We like the US generic space because that is a space where prices were falling.

They seem to have bottomed out and probably are remaining flattish now, so you should see growth coming back. The other area we like is the CDMO space in that whole pharma pack. Now, this is a sector where valuations is something which makes us a little uncomfortable.

You want to buy it maybe at lower valuations than where it is today, but there is a lot of growth in the sector. It is something where secularly there are companies which probably could grow earnings 20% to 30% over the next three-year, five-year. So, with that secular growth investors can make money. They should just be careful of what valuation they are buying it at.

Would you say that areas like new-age platform companies the like Zomato, Paytm, etc, as well as real estate has topped out at least for the next 12 to 18 months?
Jyotivardhan Jaipuria: So, if you take the new-age platform companies, we did not really buy them. We have not owned them for some time now. Because in our whole philosophy of valuations, they were not fitting in. We were finding them quite expensive. Some of them have corrected. So, to that extent, maybe they have become cheaper for people. But in our framework, it is still something we are not buying it.

Real estate is something where we think some of the ancillaries to real estate are probably more interesting than to real estate. Demand has been strong, but the feel we are getting is in the last couple of months demand has stagnated a bit and is starting to slow down. Some of the ancillaries like wire and cable over there or maybe the tile space, the ceramic space, these are spaces which we are more focused on because if we look at the whole ceramic and the tile space, there demand has not been good and typically, demand should come with a lag after the real estate does well.
So, we think demand will pick up in some of these areas over the next 12-18 months and valuations are much-much cheaper than what they are. So, we like the real estate space as such but probably playing it more through the ancillaries now.

Also, talk to us about some of these new-age tech companies, specifically in the QSR space, the one which already had a lot of these investor interest and given the correction of late, yes, the earnings did play a spoilsport there. But also at the other hand, there is a huge opportunity for growth for all these companies. So, do you believe that any of these companies are at an attractive price point or valuation wise you like some of these new-age tech companies?
Jyotivardhan Jaipuria: So, over the next like three years, five years, seven years, some of these companies will become very big. What you can see is there is a total change in buying pattern consumer behaviour and everybody is moving to the tech companies and rather than going to shops to shop or order food or eat food. So, they will become much-much bigger. Now, if we see like the mortality rate in all these over the years, it is quite high. So, it is like a winner take all model and there will be couple of companies which will do very well.

So, one is being able to forecast that company which will do well and need not necessarily be the company which today sounds good. But there is a big first mover advantage in this space, which tends to sustain unless you really have a problem with implementation and somewhere along the way.

The only thing is that a lot of these companies tend to make losses, you need a constant round of funding, which tends to dilute the cap equity shareholders.

So, to that extent for us, when we build that into our model and then we start thinking of valuations, it is like there are stuff which we can find cheaper which probably may not give the same sort of return, but at least on a risk-reward basis works out to be more comfortable.

For us, most of our stock picks, the margin of safety is very important and that is what makes us maybe at these valuation not buy some of these stocks.

The two big themes that everyone was talking about, energy transition and EMS. Both have come under acute pressure. One is facing headwinds from the US and one is facing uncertainty with respect to the budget propositions, your take?
Jyotivardhan Jaipuria: So, it is always like the themes will play out and the themes will continue to play out but it is what valuation you play. So, if you look at all the EMS companies, they are still growing and they will probably grow strongly over the next few years. It is just that at these valuations what are you paying already for it? Are you paying too much too soon for it?

And if there is some slippages in implementation because they work with a few companies, one company cancels their order or the sales of that company does not pick up, then there is no margin of safety over there. So, basically, in principle, we like these themes. It is just that at these valuations, we struggle to find companies which we think are a decent risk-reward equation over there.