Rural consumption may be in focus; caution needed on valuation mismatch in public sector undertakings: Kshitiz Mahajan on Union Budget 2024

In an exclusive interview with ETMarkets, Kshitiz Mahajan, CEO, Complete Circle Wealth, discusses the potential market performance post-Budget, highlights key sectors to watch and provides insights into effective strategies for utilising the Union Budget money.

Fragments:

Q: Let’s start with how Sensex and Nifty have performed in the last month. Historically, the market tends to remain flat in the week before the Budget. Post-Budget, Nifty has averaged a return of around 5.7% in the month following the Budget over the last decade. What do you think about this rally and what do you expect from the markets?

Kshitiz Mahajan:

This is an exceptional budget. Initial expectations were a clear mandate but it looks like a coalition government is forming. This change could result in a budget more focused on rural and consumption-led growth. I foresee significant relief for the agriculture sector and growth drivers for rural areas. The government is likely to continue to push the manufacturing sector. Markets are reacting differently after the election results but we need to be careful about valuation mismatches that could strain the rally. I expect a budget focused on the middle class and rural areas with no significant changes in taxes, although there could be some tax benefits for deposits. On the equity side, I expect status quo.

Q: Coming to valuations and specific sectors, which sectors do you think will be the focus pre- and post-Budget and why?

Kshitiz Mahajan:

Consumption, especially rural, will be the main focus. Mapping out the value chain, we see companies benefiting from rural consumption, including those in construction and clean consumption, such as ITC and Emami. These are not recommendations but examples. The banking sector, which has been lagging behind the Nifty for the last four-five years, could see a boost on the back of reforms and potential treasury gains as interest rates come down. Manufacturing is another key sector, with potential additions to the PLI scheme and the government’s target to increase manufacturing’s contribution to GDP to 25% in the next few years. This sector boosts GDP, job creation and self-sufficiency. Auto and auto ancillary sectors are also strong candidates, given India’s global dominance. Defence is another sector with potential, but there is a significant valuation mismatch at present, so opting for the fund route may be safer.

Watch the full interview here.

Q. PSU stocks have seen a huge rally, a huge rally before. Now many feel that valuations of PSU stocks are a bit high. What is your take on PSUs in general and what should investors who have already invested a lot of money in PSU stocks do?

Kshitiz Mahajan:

We have seen extraordinary growth in some PSUs but their earnings have not matched this price growth. PSUs which used to trade at 6-8 P/E multiples are now trading at 13-14. When you buy a stock, you are basically buying a company. If a company is growing at 15-18%, the stock price should not grow by 30-50%. Either the earnings have to catch up or the prices have to come down or the prices have to remain stable until the earnings grow.

We are currently in earnings season, with many companies posting strong results. Unlike the 2008 financial crisis, today’s market is trading at a more reasonable multiple of 22.5-23, compared to 27-28 back then. In addition, we have experienced a non-inflationary environment over the past six quarters, which is positive.

In the case of public sector companies, focus on those with significant value chains and good valuations. Beware of valuation mismatches; for example, paying 70% P/E for a company that is expected to grow earnings by 15-16% per year indicates a large mismatch. If your portfolio has seen significant gains, consider taking some profits now, as such mismatches are unsustainable.

Q: What would be the ideal PE salary figure to help our listeners evaluate their positions?

Kshitiz Mahajan:

Different sectors use different valuation metrics. For example, financials use price to book value, manufacturing uses EV to EBITDA, and IT/FMCG often use price to earnings (PE) ratio. PE is a common metric: if a stock has a PE ratio of 30 and earnings per share (EPS) growth of 18-20%, then that’s good. Even an EPS growth of 15-16% is acceptable with a PE ratio of 30. PE is calculated as price per share divided by earnings per share. If the EPS growth complements the PE, then that’s reasonable. But if the growth doesn’t support the PE, prices will eventually correct. It’s important to reassess your portfolio. If you can’t analyze stocks full-time or follow quarterly reports, consider safer large-cap portfolios or mutual funds and PMS options. This is not a job to do alone; it’s hard-earned money. We’ve seen periods like 2011-2014 when markets stagnated. Be vigilant with your investments.

Q: How should investors approach markets after the Budget announcement?

Kshitiz Mahajan: The market always creates opportunities, whether earnings are high, some companies are posting good returns or there are budget related changes. Sensex started from 100 in 1979 and is now close to 81,000, giving about 14% compound returns over the long term, excluding the last four years. Similarly, Nifty started from 1000 in 1993 and is now around 25,000, with compound returns of 11%, excluding the last four years.

Regardless of the short-term market performance, the underlying businesses will continue to operate and generate value. Whether you invest before or after the Budget, it is wise to spread your investment (say Rs 100) over 12-14 weeks in mutual funds, PMS or stocks. Trading is often seen as a quick way to make money, but wealth is usually built through long-term investing and the power of compounding. Conservative investing at 12% annual returns can double your money in six years, quadruple it in 12 years and multiply it 32-fold in 30 years. For example, Rs 1 lakh invested at the age of 20 can grow to Rs 32 lakh in 30 years. The belief in India’s nominal GDP growth of 12% (7-7.5% real GDP and 5% inflation) supports this potential return, even in index funds. Trust the power of capitalization and give your portfolio time to grow.

Q: Could you discuss what equality means in 2024 compared to previous years?

Kshitiz Mahajan: A person approaching retirement asked me if he should buy back his investments and put the money into fixed deposits (FDs). I advised against it because FDs often give 6.5% pre-tax, which is lower than the 7.5-8% food inflation rate. After tax, FDs give around 5-6%, not beating inflation.

Understanding the rule of 72 can help: dividing 72 by the investment rate gives you the years it will take for your money to double. For example, at 12% interest, your money doubles in 6 years (72/12). The same is true for inflation: at 9% inflation, the value of your money halves in 8 years (72/9). Investing in stocks is essential to beat inflation and generate profits. Whether you’re young, middle-aged, or retired, preserving wealth means investing in assets that outpace inflation. Real estate and some fixed-income assets can beat inflation, but stocks remain key for liquidity and growth.

For retirees, instead of selling your entire portfolio, consider systematic withdrawal plans from mutual funds or stocks. With no social security and increasing life expectancy, planning for returns that outpace inflation is key. Properly allocated investments are essential to maintaining a lifestyle, especially in a long life without social security. This is not to scare you, but to emphasize the importance of long-term planning.

Disclaimer: Recommendations, suggestions, views and opinions expressed by experts/vendors do not reflect the views of Economic Times.

(You can now subscribe to our ETMarkets WhatsApp channel)