Envision Capital Founder Nilesh Shah and Sohum Asset Managers Founder & CIO Sanjay Parekh, speaking to CNBC-TV18, believe domestic demand and earnings momentum are providing support to the market. But their approach is selective, with opportunities emerging in areas ranging from digital financial services and UPI to artificial intelligence (AI), advanced manufacturing and non-ferrous metals.
At the same time, both investors see reasons to be cautious in parts of the market, including large-cap IT, banks and steel.
Why Indian markets are holding up
Shah said the resilience of Indian equities has been notable given the rise in crude oil prices.
“For oil to go from $60 to $105, and maybe in spot prices, or the Indian crude basket trading at $130, so it’s pretty much doubled. And the fact that the markets have still held on, I think, is quite phenomenal,” he said.
According to Shah, earnings momentum, GDP growth, regular policy changes and domestic savings have all supported the market. Domestic investors, he said, are providing a “huge cushion” to equities.
Parekh also sees strong domestic momentum. He said demand for passenger vehicles, commercial vehicles and two-wheelers had surprised him, while credit growth has also been strong.
He added that first-quarter earnings growth across the Nifty, mid-cap and small-cap segments had surprised positively. Some of that improvement was due to inflation and inventory stocking, but he expects earnings buoyancy to continue into the second quarter.
For Parekh, the global environment remains a headwind, particularly because of crude oil prices and the 10-year yield. He also pointed to the large supply of new paper, saying ₹3.4 lakh crore of paper came to the market between January and August.
Digital financial services and UPI
One of Shah’s biggest areas of interest is digitisation.
His focus is on businesses that are using technology to grow, gain market share and create relevance. That applies across consumer businesses and financial services, including insurance, credit and stockbroking.
In insurance, Shah said his preference is currently more towards distributors rather than manufacturers of insurance products.
Payments are another part of the opportunity.
Shah believes the introduction of merchant discount rate (MDR) on UPI transactions could be incremental for payment solution providers. However, he said the eventual opportunity for individual companies would depend on how the revenue pool is distributed among the various stakeholders.
More importantly, he sees a much larger opportunity from the expansion of UPI itself.
Shah said he believes there are currently fewer than half a billion active people using UPI for payments and that the number could eventually rise to 1 billion or even 1.5 billion.
“Everybody is going to be using UPI. All transactions will happen on UPI,” Shah said.
He believes the opportunity extends beyond payments to businesses that can use those platforms to distribute other financial services.
Capital markets: distribution and wealth management
Shah’s preference within the capital-markets space is also centred on digital platforms rather than pure stockbroking businesses.
He believes platforms that can onboard millions of customers and offer them equities as well as mutual funds, bonds, currencies, commodities and wealth-management services have an advantage.
That makes distribution an important part of his investment approach.
Shah said some dedicated mutual fund distributors have already built strong distribution platforms, while some stockbroking businesses are transforming themselves into wealth-management companies.
“For now, the guys who are distributors or distributing products will be the big winners out there,” he said.
AI opportunity lies beyond the large IT companies
Shah is less positive on large-cap IT services companies.
His concern is not valuation. He said valuations may be attractive, but growth is missing and it is unclear how soon that growth will return.
He believes the immediate requirement is for these companies, which have been growing at mid-single-digit rates, to ensure that growth does not slow further.
His preference is towards mid-cap and small-cap IT services companies that can benefit from AI implementation.
The reason is the difference in scale.
For a large IT company, a few hundred million dollars of AI-related contracts may not materially change the growth trajectory because such contracts could come at the expense of existing legacy contracts. For smaller tier-two, tier-three and tier-four companies, however, winning such contracts could have a much bigger impact.
That is why Shah sees smaller IT services companies as a space to watch as AI adoption develops.
HDFC Bank: profitability needs to improve
Parekh remains mildly underweight on banks. He is overweight on SBI and Axis Bank but remains underweight on HDFC Bank.
His view on HDFC Bank is not based on concerns over the quality of its book. In fact, he described the book as “pristine” and pointed to excess provisions.
The issue, according to Parekh, is the improvement required in net interest margins (NIMs), return on assets (ROA) and return on equity (ROE).
He expects the bank’s ROE to first reach 14% and then 15% before the stock can see a price-to-book re-rating.
“So, I think, on the COVID lows and the 2008 lows, the current valuation is just there. And that’s where I think it should see a bottom,” Parekh said.
Why Parekh prefers non-ferrous metals
Parekh continues to prefer non-ferrous metals over steel.
He gave three reasons for that preference. First, he does not see China as a net seller in the non-ferrous segment in the same way as in steel. Second, steel producers have to deal with coal and coking coal volatility. Third, steel pricing is particularly important for end users because of the quantities involved.
Within non-ferrous metals, Parekh highlighted Vedanta Aluminium and Vedanta. He said they were trading at 4.5-5 times EV/EBITDA, with return on equity of more than 50% and a payout of 4% to 5%.
Manufacturing’s shift towards advanced technology
Both investors see opportunities in manufacturing, although they approach the theme differently.
Parekh said some parts of the sector have become expensive, but there are still reasonably valued opportunities, including in capital-goods manufacturing and ancillary businesses.
For Shah, the opportunity is broader than conventional manufacturing.
He sees energy security or decarbonisation and indigenisation as two major themes driving advanced manufacturing in India. He also sees deep technology increasingly moving into manufacturing.
Shah pointed to innovations aimed at reducing dependence on rare-earth minerals used in magnets and said such developments represent a shift in the way manufacturing is being approached.
“Growth and capital efficiency are pretty much like the Karan Arjun of investing. Have both of these, and I think after that, valuations are less of a concern,” Shah said.
For him, innovation-led advanced manufacturing is one of the major opportunities for the future.
Jewellery: governance remains a key filter
Parekh is also cautious about simply chasing the strong performance of jewellery stocks.
He said he has looked at some of the newer companies coming to the market, but stressed the importance of trust, accounting practices and governance.
His approach is to apply a stricter filter on governance and determine which businesses remain clean when the cycle turns.
That is also why he continues to prefer the established player in the segment rather than simply following stocks that have recently performed well.
What the two investors are looking for
Shah and Parekh have different approaches, but their comments point to a common emphasis on stock selection.
Shah is looking for businesses that can use technology to scale, gain market share and create new opportunities. That leads him towards digital financial services, UPI, distribution, wealth management, smaller IT companies and advanced manufacturing.
Parekh is more focused on the gap between price and value, earnings, balance-sheet strength and valuation. That shapes his preferences for selected domestic businesses, non-ferrous metals and specific stocks rather than the broader banking or steel sectors.
The message from both investors is that global headwinds have not eliminated opportunities in Indian equities. But the areas they favour are increasingly specific — from the expansion of digital payments and AI implementation to advanced manufacturing and businesses where valuations and earnings potential remain attractive.
