The market prices are a function of PE into EPS. A multibagger is hit when you get the earnings right and when the stock goes through PE expansion. So let us identify pockets of where you think there could be 15-20% earnings growth for the next two to three years as well as PE growth – multibaggers.
In consumer discretionary, speciality chemicals and certain pockets like engineering side, I feel there is a room for earning growth to continue with the formalisation of economy and consumption really kicking in. These are the pockets where earnings can grow and which has a potential to re-rate because these businesses throw good free cash flow and so that ROE expands. So there is a case for a PE multiple to expand too.
Where will banks feature in all of this? We have seen the FIIs come back and financials was one beaten down space following FII exodus. Where will all of that play for you?
As the worst of fear on liquidity goes away we are seeing currencies behaving well and now FIIs are coming back into the market. We had some issues on our BOP balance till middle of July, but now as FIIs are coming back and oil prices are moderating, the market is sensing that liquidity will not be as bad as it was feared. The lender had a lesser deposit franchise now the risk-on is on so they are recovering. As the risk-on is on, the second-tier banks and NBFCs are now looking better because they were beaten down and trading at a discount to largecap peers.
We hear so much about India Inc’s capex cycle change; the big thrust for capex, construction, infrastructure. But we are not seeing the construction company stocks doing cartwheels. Will we start to see higher allocations for that sector?
What has happened in the infrastructure sector is that they have an accumulation of order books of the past also, where the input prices were at a very subdued level. As the input prices had gone up and interest rates have also risen from those levels, we are still seeing the big earning delta not coming. My sense is that with the moderation in the commodity prices going forward, the execution will pick up. So things will start looking better if there is no change in external environment because the companies have a great order book and now the older orders are likely to be completed in the next three to four months. So, things would look better going into the next fiscal actually.
« Back to recommendation stories
At the beginning of the year there was euphoria in tech and the outperformance moved from tech to value or energy stocks whether it is . , , all those so-called value stocks made a comeback. If you bought stocks based on dividend yield, value, PE multiple, you had a good 2022. Is that trade here to stay?
There is still a lot of uncertainty. We are in a calmer period from July till the end of October or early November, which are summer months and energy demand in Europe is still quite low. We are still not out of the woods and that is why coal prices are still remaining at elevated levels.
We do not have a clue as to what will happen in November, December and January. So the portfolio should have a balanced approach before you get a material sign of how the energy market is going to behave. I will not say the worst is behind us or things are looking very rosy from India’s perspective. I would rather be cautious.
On the IT side, top line growth is still very much there and the only issue is with normalisation of visa, travel and too much attrition, the salary hike is higher. So there is cost pressure but their client billing has not gone up that much. We are seeing perceptible margin pressure in the sector. The only good part is that top line growth is there. Whenever this kind of headwinds subside, one can still value the IT sector but it is better to take a balanced view.
Typically when you are looking to invest for 3-5 years, you like to buy companies which are at an inflection point or are gaining market share or the sector is cheap. Let us divide your portfolio into three parts — tactical, structural and compounding kind of in-favour stocks which one will buy because India will grow.
The structural story in India is really consumption, especially the consumer discretionary side where we are at an inflection point in terms of consumption. So, whether it is electrical goods, brown goods or white goods, the segment is likely to do very well.
Hotel, travel and tourism is also a structural story in India that will play out very well.
The tactical trade currently is related to the uncertainty in the energy market. That will be our tactical play in India.
In terms of the compounder kind of story, one has to look at the financial sector because it is still underpenetrated in India. We have 60% debt to GDP ratio. We have a long way to go from here and the financial in my view is a core compounding story, including some of the consumer staples in the portfolio.