Foreign Outflows Signal Currency Concerns, Not Weak India Fundamentals: Aditya Birla AMC
Harish Krishnan, Chief Investment Officer - Equity at Aditya Birla Sun Life AMC, has clarified that recent foreign outflows from Indian markets primarily reflect currency concerns rather than any negative assessment of India's fundamental economic strength. In an exclusive interview, Krishnan provided detailed insights into how currency movements, budget implications, and sectoral opportunities are shaping the investment landscape.
Rupee Depreciation Provides Natural Hedge for Indian Companies
Krishnan emphasized that approximately 55-60% of top-tier Indian companies generate revenues linked to the US dollar, spanning sectors including energy, metals, pharmaceuticals, information technology, and automobiles. This substantial dollar exposure means that rupee depreciation actually provides a natural hedge and revenue boost for these corporations.
"For Indian companies, rupee earnings per share can grow even when dollar earnings stagnate, largely due to rupee depreciation," Krishnan explained. "A weaker rupee lifts revenues in rupee terms, even if margins compress slightly due to foreign-linked costs."
He illustrated this dynamic with a practical example: "A move of the rupee from 80 to the 90s against the dollar can lift the revenue pool by 3-5% as more than half of revenues are dollar-linked. This directional benefit helps revive revenue growth, which has remained weak over the past 2-3 years despite margins near 20-25 year highs."
Budget Unlikely to Shift Medium-Term Equity Assessment
Regarding the recent Union Budget, Krishnan noted that while the higher Securities Transaction Tax on Futures and Options trading might surprise equity markets, the overall budget is unlikely to cause meaningful shifts in medium-term equity assessment.
"Some relief on buybacks may help return excess capital in a few mature companies, which can then be recycled into newer, capital-intensive opportunities," he said. "Overall, we do think the last 15 months have been a reboot opportunity with significant policy resets in the backdrop of geopolitical developments and global macro uncertainties."
Krishnan advised investors to approach markets with a fresh perspective: "It is thus imperative for investors to frame investment opportunities from a fresh lens—to assess that, over the coming 3-4 years, a newer set of themes and sectors is likely to be winners compared to investment theme-heavy winners in 2021-2024."
Investment Framework and Sector Opportunities
Krishnan outlined a comprehensive four-parameter framework his team uses to identify investment opportunities:
- Profit Pool Share Analysis: Tracking sectors' profit share relative to top companies over 25 years
- Market Cap vs Profit Pool Comparison: Identifying where market capitalization runs ahead of or behind profits
- Ownership Pattern Assessment: Analyzing clustered versus under-owned sectors
- Size Effect Tracking: Monitoring whether returns come from large caps or microcaps
Using this framework, Krishnan identified several overlooked opportunities: "We think that if you look at the market today, there are several names in consumption, staples and retail that are still being ignored, not because they are performing poorly, but largely because promoter ownership is very high, at around 50-75%, leaving very limited free float."
He specifically highlighted: "Some consumer staples, even though they have higher price-to-sales ratios, are generating significant cash flows and could be a better bet than recent winners such as EMS or hospital stocks."
New-Age Companies and Market Dynamics
Regarding new-age companies, Krishnan offered a balanced perspective: "This is a much-debated space. These are evolving businesses, which makes them difficult to value. Many are barely profitable on an adjusted basis, and several are still loss-making."
However, he noted an important data point: "Loss-making companies today account for just about 1.7-2% of total market capitalisation, one of the lowest levels in the past 25-30 years. Historically, Indian markets have absorbed far higher levels, often 4-5% or more."
Krishnan emphasized that patient capital and careful selection are crucial in this space: "The key is patient capital, careful sizing, and backing companies with strong unit economics, a credible path to profitability, differentiated models and driven founders."
Large Cap vs Small Cap Dynamics
Addressing the divergence between large cap and small cap performance, Krishnan explained: "Earnings for large companies typically double every five to six years, while small caps do so slightly faster in four to five years. Over the past five years, earnings surged across the market from a low base."
He highlighted an important ownership dynamic: "Small caps now contribute about 12-13% of profits but account for nearly 22% of mutual fund ownership, making the space crowded and limiting near-term upside. In contrast, the top 100 companies generate 68-70% of profits with only about 54-55% ownership, leaving more room for upside if earnings surprise."
Krishnan concluded by reiterating his central message: "Foreign outflows today reflect currency concerns, not a negative view on India's equity fundamentals. Once the rupee stabilises, it creates a higher earnings base, which should support valuations over the next three to four years."
