Asked whether the markets have already absorbed the impact of West Asian tensions, Darmesh Kant of Cholamandalam Securities said that pressure on equities had already started before the latest geopolitical unfolding.
“I don’t think the poison is out of the system. I mean there are two parts. Before the West Asian crisis or the Anthropic event happened, the market was already under pressure, despite the Q3 numbers being better, selling on the expectation that the numbers would be better. So the point I’m trying to make is, is 12% to 15% PE a good return for most of the time? One-and-a-half years of going through the kind of restructuring suggests that,” he said in an interview with ET Now.
According to Kant, geopolitical developments have only accelerated the adjustment already underway. He indicated that the current situation in West Asia may persist for a long time, which may keep the markets volatile.
He said: “In the background of this whole scenario, this news spreads quickly, accelerate the selling pressure in the market, so the West Asia is still in the first stage, Iran has the tendency to prolong the war for 20-25 years and does not give up easily, the Iraq-Iran war is a testimony of this.
He warned that the conflict could put pressure on supply-driven inflation and add another layer of uncertainty to global markets.
“So, there are headwinds in the form of supply-led inflation. How to negotiate again is a kind of mechanism and we will react to the daily news in the market, so the selling level may decrease. I mean, borrowing may not be available from here, but the potential increase in the market is not expected to invest.” Be careful with selective focus on sectors that can benefit from domestic economic activity.
“So, we’re very cautious in the market, only a few sectors that we would buy on the downside and that’s a place like banking where we still feel there’s a lot of upside, banking, infrastructure, building materials, metals and autos. Other than that, just stay on the sidelines and see how things develop.”
Regarding the defense sector, Kant maintained a positive long-term outlook, even though the stock price has been uneven over the past year.
“Look, what’s happening for defense companies is that as we’ve grown in the sector over the last two years, although the last year has not been good in terms of share price, but as far as the order flow has been, it’s still there. I mean there’s continued order intake and there’s a 12% to 15% implementation rate, which is doable for defense companies.” said
However, he explained that companies involved in major defense manufacturing projects naturally have long execution schedules.
“Except for BEL because it’s a day-to-day type of supply for the company, their execution is very quick, but Mazgun Dock or Cochin Shipyard or HAL for example, they build ships and planes, combat helicopters which takes time. It’s not like it’s delivered in one or two quarters,” he added.
Kant emphasized that structural opportunity remains in the defense sector, supported by strong order books and increased localization of production.
“So, for the long term we are very happy about that. I mean the order book itself is 4.5x to 5x the bill ratio and the margin has improved because now more inputs are being produced in India. So the concept of make in India, almost 60% of parts will be produced in India in two years.” So this is a construction game.
He suggested that investors should stock up on quality defensive names during reforms rather than following rallies.
“So, the strategy is that because of negative reporting by few brokers everywhere or something like that or one or two bad quarters you have to buy there, don’t buy it in the rally, and the best option is still BEL, HAL and Mazagon Dock, so those are the three counters where we think if you are a custodian for two to three years, it will be a very good offer and it will be a very good offer and it will be very good numbers in the P&L. To be seen by you,” Kant said.
When asked about positioning the portfolio amid changing global business dynamics, Kant said his strategy has always been geared towards domestic demand rather than export-based opportunities.
“We have always faced domestic. We have never reduced our portfolio based on signing FTAs because it has been signed. There is one more year, the fine print will come out and how it is negotiated and Europe is a very difficult country to do business with because of environmental norms and other human rights norms,” he explained.
He added that compliance challenges and evolving global tariff structures make export-oriented conditions uncertain in the near term.
“And now that the US tariff is again subject to change every day, every three or four days it changes to 25%, 15%, 10%, now it says 15% and then in five months it will go up, so this is a matter that you should completely ignore and avoid,” he said.
Instead, Kant believes investors should focus on sectors that are closely linked to India’s domestic growth story.
He said: “But the safest is facing the domestic economy and we think that the infrastructure space will continue to do well. Cement will continue to do well. Metals, domestic producers will have business in their hands. At the same time, because banking is a proxy for all, it will get business.”
However, he advised non-bank financial companies to be cautious as interest rates could remain high for a long time.
“The only thing that we now think should be avoided to some extent is the NBFC space as the cycle of interest rate cuts may be halted at least for this year in the light of what is happening and inflation may be moving forward. So for the NBFC space some cost of funds will rise, not for the banking space as they will be able to hold large deposits,” they added.
Overall, he remains bullish on sectors related to India’s structural growth themes.
“So, the very basic structural economics that the sector is facing is something that we’re bullish on. The cars you’re buying are still shrinking,” he said.
