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rajesh kothari: We were a little ahead of time but still betting on these 4 sectors: Rajesh Kothari

“One has to be on the right side of the economy and the right side of earnings growth and that is how we are constructing portfolios. We were a little bit ahead of time in building our positions in capital goods, automobiles and auto ancillaries. Specialty chemical was and remains a favourite from the last four-five years,” says Rajesh Kothari, Founder & Managing Director
, Alfaccurate Advisors

A narrative is now emerging that the economy back home in India is much more resilient than the US economy. Flows have started to ebb, at least the huge outflows from FIIs and there is a case emerging that Indian markets could outperform global markets. Do you think this is justified and conceivable?

One thing is very clear that the Indian economy is in a much stronger wicket compared to what it used to be in the last 20 years, whenever such global turmoil happened. Whether you look at the fiscal deficit perspective or current account deficit perspective, it is getting reflected in our currency depreciation, which is much lower compared to any other economy in the emerging market.

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Economies are definitely much stronger and that gives the right macro which is required for India to continue to do well. Will it outperform other global markets ? It means I have to predict every global market. I do not think that we should try to do that.

Can corporate India deliver 15% plus earnings growth over the next two-three years? The answer is definitely yes. Look at the non-food credit growth. Very healthy numbers came yesterday. It is probably the highest in the last 100 months, if I am not wrong.

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That also indicates that the economy is in a good restart mode. The capex has started, the non-food credit growth is indicating that lending and disbursements have also started. The corporate earnings were also reasonably good in the first quarter, despite so many challenges on the raw material side. We are, overall, in a good state of health.

How are you structuring your portfolio to play this robustness in the domestic economy? You talked about early signs of capex and non-core credit growth. How are you capturing all these data points in your portfolio?

One thing which is very important is to understand that the portfolio is just not about what to buy but is equally about what to sell. Look at the incremental Nifty earnings growth and the from where that is coming. If you look at FY22 versus FY23, there is likely to be a huge change.

For example, in FY22, the contribution of auto was zero but in FY23 that is going to go up significantly. In FY22, the contribution of metal was huge but in FY23, the metal is becoming zero and so on and so forth. For example, contribution of banking and finance to incremental growth is steadily moving up. It has moved up in FY22, it will further move up in FY23.

Look at the capital goods contribution to the Nifty incremental growth. There are two legs of wealth creation; one is what to buy and second is when to get out of it and one constantly needs to make sure that the portfolio is aligned rightly to the right sectors and right companies.

One has to be on the right side of the economy and the right side of earnings growth and that is how we are constructing portfolios. We were a little bit ahead of time in building our positions in capital goods, automobiles and auto ancillaries. Specialty chemical was and remains a favourite from the last four-five years. We have been extremely bullish on that. We have discussed it many times in our previous episodes. These are the sectors on which we are reasonably bullish and confident even at the current valuations.

You spoke briefly about the way incremental earnings contribution is rising in auto and auto ancillaries. The auto numbers for August have started coming. Where does your preference lie within autos where incremental growth in earnings will be highest?

I think the bigger story in the automobile sector is the auto ancillaries part of it because irrespective of whether company A or company B gains market share, the auto ancillary company supplying to that sector will definitely benefit immensely.

A disclaimer,we have a holding in

, this is the largest company going by number of components – be it airbags, seats, horns and many other components in which the company is a market leader. The company has grown its revenue and net profit by 10 times in the last 10 years. The company is rightly positioned to benefit from the new features , whether it is a safety feature, the electrification of the vehicles or censors and many more such components.

The company is also the largest beneficiary of alloy wheels because they are supplying to

for the passenger vehicle segment. So one needs to basically buy the businesses which are robust and which can disrupt others rather than getting disrupted. We are very positive on auto ancillaries.

In automobiles, we like Maruti. We believe the product launch cycle is going to be a beneficiary over the next two years. The company has lost a little bit of market share in the last two-three years because of the absence of products in the SUV segment. The that product launches will refill that gap and Maruti is an elephant and when elephants dance, you know what happens.

I do not see any reason why Maruti will not be able to regain its market share which it lost in the last couple of years. These are basically a few names we hold in auto and auto ancillaries.

What about capital goods? There is a big breakout after 10 years in the capital goods index, technically as well as fundamentally. It appears that stars are aligning for that sector. How are you playing that space in your portfolios?

It is a very interesting space. During 2000 to 2015, whenever you asked somebody about capex, they talked about roads, ports, power, transmission, railways, metro and all the drivers. But today when we say we are bullish on capex, we do not own any EPC company in our flagship IOP PMS plan. We do not own any irrigation companies.

What we own are companies which will benefit from automation, companies which will benefit from robotics, companies which will benefit from the process efficiency related capex and many such themes like data centres.

The expected capital expenditure on data centres alone is going to be roughly about Rs 60,000 crore. So whosoever supplies to that data centre depending upon switchgears or switch or lights or transformers and entire suite of products definitely will be the largest companies.

And not only do we need to supply to such production data centres but also need a backup. So, companies like Cummins will be the biggest beneficiary of the data centre theme. We own companies which have technology as a moat, companies where the product portfolio is very robust. In this space, we own companies like

, Cummins and which is into bearings and which is a proxy capital goods play.

The third largest pump company in India called

is a German company. We hold KSB Pumps and companies like these. The entire portfolio is primarily technology driven product portfolio, irrespective of green-field or brownfield.

In fact, all companies that we track have seen the highest order book vis-a-vis the last three years, I am talking about pre Covid years. Even compared to 2019 and when compared to 2022, in the first quarter, the order book growth has been very healthy and that shows that capex is happening in the country and this order flow will turn into revenue over a period of time. The order book is critical if you want to bet on capex and that is very healthy for our universe of companies.


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