markets: Market correction presenting opportunity for long-term investors: Milind Karmarkar

“So, there is uncertainty. I definitely agree. And as you said that there is de-globalisation, there is a tariff threat which is there,” says Milind Karmarkar, Dalal & Broacha.

Last time when we met, there were excesses. There were excesses in the small and the midcaps. There were excesses on the upside, but are there excesses on the downside now?
Milind Karmarkar: So, it is like this. Yes, the market has corrected and normally, whenever the market corrects, it corrects very viciously and that is what has happened. How long it will continue, I really do not know. But do I see upside from here? Yes, I do see an upside. And this is not the end of the bull market, as you say. There is a lot more still going to happen. And as I think Templeton has said, I do not remember, that whenever there is blood on the street and even if it is your own blood, that is the time to buy, so that I think will answer the question. So, let us first understand that why markets have fallen, then we will talk about whether that is blood or water. So, markets have corrected because of two factors. High valuations and slowdown in earnings. Have valuations corrected enough even after the correction?
Milind Karmarkar: So, let me just give you a parallel to this. Way back 2002 to 2008, we saw markets going up about six-and-a-half times and there were many corrections, 10%, 15%. But the largest correction, which I remember, was in 2006 May when the market dropped almost by 30%. There was no reason, practical, specific reason.
People said that FIIs are booking profits. People said that there is likely to be a slowdown in the Indian economy. Globally, also, there are a lot of uncertainties.

As well as they also said that, basically, valuations had run ahead of time and that is when the market came down by 30%. So, most of the stocks at that point in time which were the leaders, like ABB, Siemens, Voltas, and many others, they came down anywhere between 25% to 40%. Now, between 2002 to 2006, the market had gone up by two-and-a-half times.

So, at that point in time, probably what they were talking of was justified also. But when it comes to slowdown, that time also there were no reasons to think about it and even now, I do not think there are any reasons to think about it.
The other reasons which were given at that time have been given now. So, this is a correction in the long-term bull run and that is the reason if you ask me, is the correction enough? I think in most of the cases now the stocks are trading at reasonable levels after considering the growth which they can deliver.
So, markets have corrected. We have identified the reason. There were excesses. Earnings have slowed down and valuations are attractive. Your view is that the earnings slowdown is temporary. Things will pick up and valuations are looking interactive for a long-term investor like yours.
Milind Karmarkar: Yes, that is correct. The world is changing. And I am keeping the flow part aside because nobody can guess what FIIs would be. But the world is changing because of tariffs and because of de-globalisation. These are strong permanent changes which could have impact on global growth, supply chains, etc, etc. How much of that the markets are factoring in?
Milind Karmarkar: So, there is uncertainty. I definitely agree. And as you said that there is de-globalisation, there is a tariff threat which is there. But let us look at India. When it comes to India and major of these worries are coming from the United States. So, if I look at India, India does depend on the United States for software exports. But US also equally depends on India for software services. So, I do not think there will be any tariff implications there.

Pharma.
Milind Karmarkar: Pharma, even pharma. Though Indian pharma are the largest suppliers to the United States, United States also depends on it. So, again, there also I do not think there will be any major tariffs which will come in. Many of the pharma companies in India who export to US have set up a plant in US as well.

So, I do not think even those tariffs are going to be impacted. There will be some impact, of course, on commodities. But there again, if you see, US will be importing inflation because of these tariffs and these could be short term. So, I am not so concerned about it.

We will refer to this data for the benefit of our viewers a little later, but the US healthcare cost is growing at 7%. US economy is growing at 3%. You put in tariffs, you actually make medicines more expensive. And why would you want to do that when your deficit is already ballooning? So, increasing tariffs on pharma is like you are trying to shoot your leg.
Milind Karmarkar: Yes, absolutely.

Let us look at India now. We are seeing two parallel trends in India. One, the government capex, which is slowing down and second consumption which is bottoming out. Which is a better side to lean on now?
Milind Karmarkar: So, a combination will be better. When it comes to consumption, yes, government has given a direct benefit now this year to many people and that will help significantly. Also, in terms of capex, government has kept the capex at the same level what it was in the previous years. So, I do not think there will be any major impact.
But when within capex, I would like to invest in those companies, especially companies in power and power ancillaries, where the opportunity still continues to be large.

So, let us understand consumption. The fact that one lakh crore will come back into the hand of consumer made everyone excited. But not every rupee will go into consumption, not every category will get a demand resurgence and there are a few categories which will gain disproportionately. So, this entire tax benefit cut, which has come back to the economy, which are the set of companies which would benefit?
Milind Karmarkar: A set of companies rather than that, I will think I will give you the overall segment. So, retail will benefit whether it is apparel or grocery, that will benefit significantly. I also think pharma will benefit because as you know in India after removing the day to day expenses and your real estate EMIs and all that, people unfortunately have very little disposable income, where pharma also gets impacted, not at the higher end, but lower end definitely. So, pharma will be benefited and hospitals will also be benefited.

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