Why 15-20% Equity Returns May Be Harder to Achieve, Says PPFAS's Rajeev Thakkar

The era of easy, high-octane equity returns in India may be facing a reality check as corporate profit growth slows down. Rajeev Thakkar, Chief Investment Officer of PPFAS Mutual Fund, warns that investors expecting double-digit returns must recalibrate their expectations to avoid disappointment.

Tempering Expectations: The Shift Toward Lower Nominal Returns

In a recent discussion, Rajeev Thakkar, who oversees ₹1.62 lakh crore in assets, cautioned that the "get-rich-quick" mentality in the Indian equity market is no longer sustainable. Given that corporate profits are not expanding at previous breakneck speeds, investors should brace for lower nominal returns.

Thakkar suggested that instead of chasing 15-20% annual gains, a more realistic and disciplined approach would be to aim for 10-12% over a five-year horizon. He noted that if fixed-income instruments are providing around 7%, a 10-12% return from equities represents a reasonable premium for the risk taken.

While the broader Nifty index sits at an average multiple of around 20 times earnings, Thakkar highlighted a bifurcated market. While some segments remain attractive and cheap, others are increasingly "frothy" and prone to time or price corrections.

He identified specific areas of concern:

  • High-Multiple Consumer Stocks: Companies trading at 80, 90, or even 100 times earnings are pricing in perfect future outcomes. Any minor setback could lead to significant capital erosion.
  • Hyper-Competitive Sectors: The quick commerce and food delivery spaces are witnessing intense competition between listed players, MNCs, and large Indian corporate houses. While revenue is growing, maintaining cash flows and profitability remains a significant challenge.
  • Discount Brokers: Profitability in this sector has flourished in a benign environment, but lower returns for end customers could lead to subdued trading volumes, impacting broker margins.

The Role of Cash and Global Diversification

Addressing criticisms regarding PPFAS’s strategy of holding higher-than-average cash, Thakkar defended the fund’s flexibility. He emphasized that the Flexi Cap mandate allows up to 35% allocation in debt and money market instruments, a strategy designed to manage risk and wait for better deployment opportunities.

Furthermore, Thakkar advocated for global diversification, not just for generating "alpha" (excess returns), but for risk mitigation. He pointed out that while India outperformed the US from 2000 to 2010, the US markets have outperformed India over the last few years. By investing globally—constrained currently by RBI limits to 35%—investors can ensure a "smoother rather than lumpy" investment journey.

Key Takeaways

  • Realistic Return Benchmarks: Shift expectations from 15-20% to a more sustainable 10-12% to align with current corporate profit growth trends.
  • Avoid Valuation Traps: Be cautious of consumer-facing stocks trading at extreme multiples (80x-100x) and highly competitive sectors like quick commerce.
  • Diversification is Key: Incorporating global stocks into an Indian portfolio is essential to reduce volatility and manage long-term risk.