Where do you see the best risk reward right now in this kind of a market for the next two to three years with valuation and earnings comfort matching each other?
If I were to paint a picture for the next two to three years, I see next year as a tale of two halves. In the first half, we would see a bit of earnings catch up that did not come through post lockdown. The way Diwali sales happened, in general good numbers came out. It will see a bit of earnings catch up.
In the second half of Samvat 2078 or for that matter of early part of the next two or three years, the stage one of the investment through capex cycle is starting to happen and as a follow on from that, clearly the sectors I would be more positive on would be industrials, real estate and infrastructure.
Specific financials would be another area but I would be positive to a certain extent on credit growth which seems to have bottomed out after years of deleveraging from corporates. In my opinion, select consumer discretionary where we have pricing power, would be the way to navigate through the overall two or three years. Within that, the time for macro laggards has gone. We have to find the companies aligned with the economic cycle but the big theme for the next two to three years is that which we have not seen for long — a pickup in investment or capex cycle.
Many experts are bullish on capital goods all the way from L&T to smaller midcap engineering companies. Do you like that space too?
First of all, I cannot get stock specific but the time for broad-based sector picks are gone. This is the time to be within the sector which are the execution kings, where the companies outperform, are good at execution and whether it is largecap, midcap or smallcap, those are the areas to bet on — particularly in the economy linked sectors — because that is where the capex or the investment cycle is likely to pan out.
What are your thoughts on real estate and cement and ancillary stocks?
We are broadly positive in all the segments that you have mentioned. Within real estate again, we would be owning the executions kings where the companies are heavy on residential real . Otherwise, given the early stages of investments through capex cycle, cement is a direct beneficiary. Within that, look for companies which can hold on to pricing. But overall, cement is one area that we would be positive on as well.
So we are looking for companies which have pricing power and companies which have good and solid execution capability and not just going by the macro theme.
What are your thoughts on the midcap end of the basket? Can that universe give 20-25% earnings growth over the next two-three years?
If you were to ask me whether certain set of companies within the midcap space can deliver 25%, I would probably say a resounding yes, given that within that space, we have got rich pickings across sectors where we can find companies with good execution and the fact that we would have a good economic cycle coming about in two or three years, we can certainly see a 25% plus earnings growth rate.
But on the other side, while the top line growth is there for the taking, the companies which can translate on to earnings growth are the ones which are to be bet on and those companies in the individual segments have some element of pricing power and they would be the ones where the top line growth momentum would pass on through the earnings. But a lot others would slip by.
There is clearly a concern on today regarding some of the practices at its MFI arm — Bharat Financial Inclusion. Do you see MFIs still under pressure or do you see things turning around with economic recovery?
MFI is an area which has always been prone to this sort of thing because of the category of customers that they lend to and where there inot have too much cash flow support and hence from that perspective, the way the bank or the MFI goes about lending, holds the key and this is one area which would be last in my list to put one size fits all kind of an approach. What I am saying is that one needs to understand very company specific lending policies from an investing standpoint.
Coming to recovery in this space, overall in the economy, we are seeing a very clear K-shaped recovery where the larger players or the larger or the richer set of constituents have actually done better than people in the lower strata of income have not done as well. Obviously MFI as a play on that in my opinion would be a lag play on economic recovery rather than an immediate one.
I am making two points here, one is that within MFIs, the lending practices of that particular institution needs to be analysed and secondly the MFI segment would probably see a bit of a lagged recovery as compared to the broader economic recovery across the board.
Some of the very loved large cap pharma companies have made some minor misses on their margin but their overall margin profile, especially in the API side, remains very robust. What is your take on specialty pharma and the API space?
I would use the excuse of this question to make a broader market related observation which is that with the markets where they are, broadly the macro laggards or the China plus one are all reasonably discovered themes by now. What really matters is execution from here on for the share prices of the company needs to do well — be it chemicals, API or for that matter any other sub sector.
In other words, any earnings mess would be severely punished by the markets given where valuations are and as you rightly pointed out, there is nothing wrong with the sector and with the medium term outlook, but in the near term, the margins were a little soft and they got punished by the market. Does that mean a doomsday scenario for that particular sub sector? No. But we need to acknowledge that markets at 18,000 odd levels, the asking rate for the company share prices to climb higher is clearly on the higher side. Hence not just in this sub sector, but across the board, any earnings space during the season has been severely punished and has a potential to get severely punished from here on as well.
As a sector, we are broadly positive on the sub sector but we are doing a deep dive and wherever we see an earnings potential of earnings missed potential, we are certainly being careful.