[ad_1]
Industrials continue to charm Rohit Agarwal, Senior Executive Vice-President and Equity Fund Manager at Kotak Mahindra Life Insurance. Given the macro and micro landscape that’s panning out in India, he sees a lot of headroom left yet for companies in the industrials space.
Manufacturing remains his top pick, while infrastructure and capital goods come next on the list of Agarwal’s favourites. “The capex cycle is still not full-blown and it has a lot of more legs to it. There is not yet a full-blown recovery in the private capex space. There is very good momentum in the public capex space already, says the capital market expert with 11 years of experience in an interview to Moneycontrol. Excerpts from the interview:
Do you think the food inflation is a bigger cause for concern than core inflation?
India’s inflation trajectory over the next few months will depend heavily on how food inflation evolves. The recent July reading came in at 7.4 percent, significantly above expectations, because of vegetable (particularly tomatoes), rice and pulse prices). Food prices have a ‘durable’ as well as a ‘transitory’ component. Tomatoes are highly perishable items with a short crop cycle, and episodes of price spikes are usually short-lived.
The durable risks to food inflation stems from rice and pulses. On the back of rising global rice prices amidst production concerns, domestic rice prices have also increased over the last year. While domestically rice sowing has picked up pace over the last few weeks, there are concerns about El Niño taking hold later in the monsoon season. Similarly, sowing of pulses has been 10 percent below last year.
The trend in core inflation has been encouraging. With commodities correcting in 2023 and input cost pressures fading, good prices are dis-inflating, and bringing down core inflation. If petrol and diesel prices remain under check, core inflation should remain benign in coming months
Which are the two key reasons that make India an attractive destination for global investors?
One, changing supply chain winds. While India had been attractive in terms of costs, geopolitical changes have helped it further in the recent years, as firms have finally realized the risks of being over dependent on China for their production facilities. India has finally found a policy that is working (PLI) and the decision making is accelerating – case in point Micron’s decision and execution.
Also read: Anil Rego of Right Horizons explains why midcaps, smallcaps are being favoured by investors
The government machinery is actively engaged on this front and this forms a top priority. Over the next few quarters, more announcements from other companies are expected in this regard. The success of Mobile PLI has given the confidence to expand it to more sectors where after a few niggles, we believe there are likely to be more success stories.
Two, demography. China is finally seeing the slowdown effects of its decades long one child policy. As most of the growth was investment-led, shifting supply chain will hurt it even more. India suffers from none of these at the moment- the population is young with median age 28, availability of workforce will not be an issue for several decades, and being a consumption led economy the young workforce only helps it further with the growth. Hence, this presents a very long term opportunity for investors.
Do you expect the broader markets to continue to outperform large caps in rest of financial year?
This is a likely outcome. Even though the broader markets have outperformed large caps recently, this will likely continue for some time. In the recent past, there has been a slight worsening of the Indian macro and hence we have seen the markets stagnating.
However, if the Indian inflation cools off again, which we expect, the broader markets should do well again. There has been a lot of inflows that the institutional funds are getting in their Mid and Small Cap Strategies indicating that the interest levels remain pretty high in the broader markets.
Also read: MPC Minutes – Members express caution on near-term pick up in inflation
Sectors that look attractive for investment, according to you…
We like the Manufacturing sector. Sectors that cater to either replacement of Imports or that cater to mostly domestic inherent demand. This will Include Defense, Auto ancillaries, chemicals (near term softness in demand here though).
We like Infrastructure and Capital goods as a space. The capex cycle is still not full blown and it has a lot of more legs to it. There is not yet a full blown recovery in the private capex space. There is very good momentum in the public capex space already.
Are you betting big on themes like gold financing and affordable housing?
We are not betting big on themes like Gold Financing and affordable housing.
We expect QoQ gold loan growth to moderate: Strong QoQ loan growth over the past two quarters has been driven largely by higher gold prices. Tonnage growth remains tepid, and loan to value has increased. Feedback from our channel checks unanimously suggest that aggression from banks and gold loan fintechs is not showing any signs of ebbing. While the teaser rates of 6.9 -7 percent have been withdrawn, the same has been replaced by 9-11.9 percent impacting industry yields at the margin. As such we do not see companies in Gold financing getting any material benefit in terms of margins and profitability.
Also read: Are defence stocks on the moon as well?
For Affordable housing: we believe some of the smaller dedicated players have better opportunity rather than all the players at large. There is a lot of competition in this space. Given ~200bps hike in Home loan rates (post March 2022), this has led to increase in EMIs which has impacted affordability, leading to demand moderation. Given that Housing is the largest Asset Class available for lenders, spreads are low in this business, hence most Mid and Smaller players are moving to Affordable housing which has better spreads but ticket sizes are lower.
Your take on the industrial space…
Industrials space is still attractive. In a typical cycle that we have seen for Industrials, revenues grow 4-5 times during the cycle, EBITDA tends to grow 7-8 times during the cycle and profitability tends to grow 10-12 times during the cycle.
We are not even halfway there in that cycle and given the macro and micro landscape that’s panning out in India, there is still a lot of headroom left for these companies in the Industrials space.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
[ad_2]
Source link