Updated 16:55 IST, January 27th 2025
Porinju Veliyath Warns Against Investing In Sectors Already Priced For Perfection
Porinju warned that 44-50% of small-cap stocks in India are overvalued and may face a time-wise correction in the next two years due to valuation challenges.
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With the new year well underway, investors are looking for strategies to maximise their returns in 2025. One key approach gaining traction is prioritising direct investing over mutual funds, a tactic advocated by value investing expert Porinju Veliyath.
In an exclusive interaction with Republic Business, Veliyath, who has been part of the equity markets for over three decades, shared his insights into value investing, the current state of the markets, and what lies ahead.
A look at the markets
Reflecting on the last four years, Porinju describes them as "unprecedented" for wealth creation in India. Despite a strong start to 2024, the year's second half saw consolidation, and Porinju predicts that this trend may continue into the first half of 2025, with corrections likely to persist. However, he remains optimistic about the second half of 2025, forecasting meaningful growth in the broader markets.
Notably, Porinju also gave a cautionary note, warning that nearly 44-50% of small-cap stocks in India are overvalued, and may be due for a time-wise correction over the next two years due to valuation challenges.
What to watch in 2025
When asked about specific sectors, Porinju stresses the importance of being sector-agnostic. "Every sector has its relevance in a growing economy like India, except those being disrupted by technology and AI," he explained. He also warns against investing in sectors already priced for perfection, where growth potential may already be factored in.
Porinju’s philosophy is clear: value investing isn’t tied to trending sectors but focuses on identifying stocks where intrinsic value significantly outweighs the price.
Porinju says that India holds a strong position in the global economy due to the country’s democratic resilience and economic policies. "Geopolitical uncertainties have had a limited impact on India’s growth," he observes, adding that shifts in global supply chains, particularly from China, have benefitted India in areas like textiles and manufacturing. He also praises the government’s efforts in boosting an investment-friendly environment and driving economic reforms.
Biggest challenges for investors in 2025
The biggest hurdle for investors, according to Porinju, is rich valuations in the market. "Some stocks and sectors are overvalued, but the consistent inflow of domestic money, especially through SIPs, keeps the market buoyant. With SIP contributions exceeding Rs 3 lakh crore annually, the domestic market is resilient," he explained.
Why value investing is key
Porinju believes that value investing is the best way to navigate the markets. "It’s all about finding a stock where the price is significantly lower than its intrinsic value," he says. He warns against complicating the process with excessive metrics and encourages a common-sense approach enriched by experience.
He cautions against speculative trading, which he believes often leads to losses. "It’s okay to make mistakes initially; that’s how you learn. Just avoid overextending yourself or taking unnecessary risks," he advises.
Porinju lauds the improvements in corporate governance and transparency in India, attributing much of it to regulatory reforms. "The Modi government’s policies, including demonetization and stricter governance standards, have pushed companies to respect minority shareholders and become more transparent," he added.
Citing his investment in Raymond as an example, Porinju shared how his team identified deep value in the company’s assets and future growth potential. "When we started investing, the market cap was around Rs 3,000 crore, while the company’s corporate office alone was valued at Rs 7,000 crore. Today, it’s a ten-bagger," he said. He credits this success to his ability to look beyond market sentiment and focus on intrinsic value.
Porinju believes opportunities exist across market caps. "India’s small and mid-cap sectors offer fantastic opportunities, but investors must exercise caution as nearly half of these stocks are overvalued," he warned. For beginners, he suggests focusing on small caps with solid fundamentals while being wary of manipulated stocks.
"Even if a stock’s price stagnates temporarily, focus on the company’s long-term potential. However, be ready to exit if the fundamentals change or the stock overshoots its intrinsic value," he advised.
Advice for young investors
When asked how much a young investor should allocate to equities, Porinju stressed flexibility. "It depends on your financial situation. Even starting with Rs 5,000 a month can make a difference," he said. He encourages young investors to prioritise direct investing over mutual funds to gain hands-on experience.
Porinju is optimistic about India’s growth trajectory, particularly in technology and new-age businesses. "The next $4 trillion in market capitalisation will largely come from tech-driven sectors," he predicted. He advises investors not to shy away from high P/E stocks in emerging sectors, as they often represent significant growth potential.
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Published 20:22 IST, January 25th 2025