The markets are in a flux and investors are confused. The portfolios for many are deep in red and panic is setting in. What’s even more worrying is the expectations for Q4 earnings are building up and the risk of further downgrades is weighing on sentiment. What should be the right strategy now? Samit Vartak, Founder & Chief Investment Officer at SageOne Investment says aim for longer term, identify value picks and focus on median earnings of the portfolio instead of broad Nifty earnings.
In an interview with FinancialExpress.com, Vartak explains why only tracking Nifty earnings could be misleading and how the median value of quarterly earnings provide a more comprehensive picture.
Why do you think the median earnings are a better way to showcase earnings performance?
There are different types of companies which are in the Nifty 50. There is a PSU basket, which is extremely cheap. Banks also are generally, in terms of PE multiple, always cheap. As a fund manager or as an investor, when you are picking stocks, the chance of picking a stock is not higher just because of larger earnings. What happens is that the contribution of PSU basket into earnings is much higher. When you consolidate the entire PSU list, sort of 50 earnings together, and then you take the market cap of new tools divided by the total earnings, you get a much lower PE multiple. But as a portfolio manager, you may have some banks, but you have a lot of other stocks which are generally considered to be long-term, sustainable. As a result, this PE multiples would not make sense, because one may not give 25% allocation to the PSU basket.
How does calculating the median earnings solve this problem?
I feel that median is the right multiple. When you analyse the median for Nifty 50, half the companies trade above that multiple, and half below that multiple, and the median right now (mid-February 2025), it’s still at 31 – 32x. So whether you look at the top 100 companies or the Nifty 50 companies, the median is still at 31-32 x. This is the right multiple for any investor you know. It’s always good to look at the median multiple, because it gives you the right picture to pick a portfolio from those stocks. PSUs on Nifty bring down the PE multiple, whereas most investors don’t even have those companies in their portfolio, very few, few would have. So that’s the point.
How do midcaps stack up Vs large caps when you compare median earnings?
The popular narrative now is that midcaps are trading at 31-32x multiples, which are more expensive than the large caps, which are trading at 20 -22x. This makes you deduce that midcaps and small caps are more expensive. But I would say it is better to look at the median multiple, median multiple of large caps as well as small caps around that same level of 31-32 times. So the right way, because small and mid caps do not have the PSU basket. Most of the PSUs, the likes of ONGC, Coal India, SBI are mostly in the large cap basket and the percentage of PSUs are very tiny in the mid and small cap segments. They don’t even make 5-6%.
As a fund manager what would you recommend as the ideal mix in a portfolio
So if you’re a fund manager who wants to make a portfolio of 30-40 stocks, then in the large cap, most will pick some banks. Most fund managers are going to stay away from the PSU companies. Maybe once in 10 years, you will find fund managers choosing a PSU that they may find really cheap. But the majority of them will go with banks, IT companies, and consumer oriented companies. Across most portfolio managers, their growth will be around 12-13%. It’s difficult for these companies to grow beyond that.
If you want to find really high growth companies, you’ll have to go towards the highly valued companies, like Trent or Asian Paints, trading at 80-100x times multiple. Compared to that, if you focus on reasonably good quality, small and mid caps, you’ll find many companies which are growing at 25% plus. As a result, you will get a growth of 22 -25%. It is worth probably paying a little higher multiple than the Nifty multiple for much higher growth, because in the long run, earnings will drive your returns. In the short run, valuations will drive your returns. As an investor, if you find companies that are growing at 25%, your returns will be closer to 25% but if you end up investing in the large caps, which are growing at 12-13% returns, your growth will be closer to that level.
What is your outlook on Nifty earnings, what kind of growth are you expecting?
If nominal GDP is growing at 11-12%, you will have companies which will provide 13-14% growth. This is a reasonable long-term earnings growth for Nifty 50. Over the short-term, it is very difficult to predict, mainly because, you know, there could be some slow down, the tariff impact is also unpredictable. You can’t really predict. But if you take a 5-year view, you will see this is the sort of growth trend. This is important, because if someone is coming into the equity market, they should not even consider coming into it if they don’t have a 5-year horizon. So in the five years, if you think that okay, earnings of nifty 50 are going to provide 13-14% even if you invest in the Nifty ETF, you should get that 13-14% return, especially when the valuations are near their long-term average