In an exclusive conversation with ETMarkets Smart Talk, Bhandarkar acknowledges the long-term potential of India’s defence sector, especially with increasing private sector participation and innovation around drones and modern warfare.
However, he warns that execution cycles may be long and initial investor euphoria could face unexpected challenges, making the investment journey in defence stocks uncertain and volatile in the short term. Edited Excerpts –
Q) What is fuelling volatility on D-Street – tariff war fears still playing the spoilsport?
A) Tariffs are a developing story. Although it led to significant volatility in the first quarter of the calendar year, as things stand, markets have figured that perhaps, the tariffs in their final form may not be as negative in their quantum as initially feared.
The Indian government as well as corporates are attempting to convert this challenge into an opportunity to strengthen our exports to the US and capitalise on the China plus sentiment.
Q) What is your call on the defence space? Many stocks witnessed a double-digit jump after geopolitical tensions between India and Pakistan earlier this month.
A) Drones have higher impact than expensive military aircrafts and is a classic sign of high disruption ahead. Fundamentally, war strategies are getting redefined. New wave of innovation and imagination will drive the future outlook here.
From a stock market perspective, popular stories seldom make money in the short term. We feel that execution cycles will be long and initial euphoria may face unexpected challenges making the journey uncertain and volatile.That said we are positively inclined about the role of the private sector participation in development, production and even export of defence equipment.
Q) What does rise in US Bond Yields mean for Indian markets? Historically, a rise in bond yields could trigger a rotation out of equities into bonds. Additionally, rising US yields can lead to capital outflows from emerging markets as investors seek safer returns in US bonds. How are you reading into this?
A) US bond yield strengthening have had their unique dimensions this time around given the outlook on US inflation, the deficits that the US government has been running as well as the uncertainty on growth created by the tariff announcements.
That said, we are yet to see a closure of the tariff situation. Lowering of uncertainties on that front can clearly reduce the risk premium on the yields.
That said, it’s likely that capital in US may be looking to diversify given the unprecedented uncertainties presented by the tariff related uncertainties leading to a prolonged weak growth outlook.
Spreads between India and US yields are at their lowest in recent times but India is in a sweet spot in terms of strong government finances, benign inflation and improving growth outlook.
It is indeed likely that flows continue to move towards geographies with higher growth and lower uncertainties. India definitely shines on that front.
Q) How are you managing volatility in your portfolio? Have you made any recent tweaks?
A) As the portfolios bore the brunt of the volatility driven by the tariff announcements, we did have to restructure our portfolios to maximise sectoral overlap with the benchmark as well as increase liquidity as a risk management measure, in case we got into a long drawn correction.
Sectors like BFSI, which have been suffering anemic growth, managed to outperform as regulatory tailwinds kicked along with FII inflows.
As things stand, broader markets have sharply corrected from their peak last year while macros have steadily improved with ample liquidity, lower rates and improving corporate growth.
We are now in a position to add newer stocks across market caps, thanks to attractive opportunities thrown up by the sharp correction in prices and stability in market conditions. Market is starting to focus on growth stocks again.
Q) What do you make of the March quarter results from India Inc.? Any winners and losers?
A) YoY and QoQ growth rates excluding BFSI were at 10.1% and 18.2 % for S&P BSE 500 Index based on our sectoral analysis of Q4FY’25 numbers (source: ACE Equity, JMFMF Research).
Sector wise Chemicals, insurance, telecom, consumer durable, retail and electricals showed a sharp improvement in operations yoy. However, large sectors like Banks, FMCG, IT and autos exhibited anaemic growth.
We appear to be on the cusp of an earnings recovery into FY 2026 as we face a low earning base from last year and improving government spending, lower taxes leading to consumption uptick, improved liquidity and lower rates to push up demand as well as private capex.
Q) We are seeing some activity in the IPO markets. What do you make of the companies that are getting listed – any interesting names?
A) The IPO markets have cooled down versus last year. There is much lower interest and there has been a moderation of valuation expectation.
From a long-term investors perspective, it may be a good time to allocate to few issues that come along as valuations might be more rational than in the previous year.
Q) What about SME space, which has gathered more interest so far in 2025 as compared to mainboard IPOs? Do you see froth building in this space or an opportunity for long-term investors?
A) Mutual funds had mostly sidestepped the euphoria in the SME space and this shows the maturity and the discipline of investment processes at an industry level.
At a price, given the sharp correction all across, there might be opportunities available. But most of the businesses in the SME market may not be at scale where mutual fund investors find the risk reward palatable.
Q) Where do you find value in this market for long-term investors?
A) Financialisation, formalisation, aspiration driven consumption and a manufacturing renaissance driven by china+1 remain strong themes, driven by global geopolitics and rising per capita income back home.
Most of these themes remain expensive, given the higher visibility. Sharp corrections give us an opportunity to build positions in long term structural themes at reasonable valuations.
There may also be opportunities to turnaround in sectors where either fundamentals and valuations or both have bottomed out.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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