“In healthcare, we actually thought hospitals are a better way of investing versus branded generic or generic-generic businesses. In technology while the bulk of the allocation is still services, we are underweight technology but not by much. We are saying that the new age tech companies are now de facto good businesses at good valuations but are in weak hands,” says Prateek Agrawal, ED, Motilal Oswal AMC
This year has been a hard year in terms of news and in terms of the global macro setup. FIIs have been selling, there is the Adani selloff fiasco. Markets are trying to digest what is coming next but are you surprised that despite an avalanche of bad news, markets are still firm? We are still 1% or 2% down for the year.
That has been our view. From my previous organisation till here, the base case was that 18-18.5 times one year forward earnings is where we should end. Now after this result season, the earnings for next year on the Nifty continues to be closer to 1,000 versus closer to 950 and that would put the fair value for the index between 18,000-18,500. We are close to that. We will end somewhere in that region and then going forward in the New Year, one should again expect earnings growth kind of returns.
So yes there will be noise, there will be volatility, there will be global tightening, there will be no global interest rates increases more than what people expect but in the end earnings growth you know money supply primarily from Indian investors is what will hold the markets well.
The concern now is that inflation is having an impact on consumption. Pizza companies are saying we are selling less pizza. Zomato is saying that delivery is slowing down. White good companies are saying that AC, fridge, TV toaster nahi bik raha hai. Are markets factoring that in that a slowdown already has come in on the consumer end?
Yes, I think so. The stock prices of the pack that you just mentioned have seen a sharp cut. Let me share a view that for a very long time, the Indian economy was led by consumption. Now the thesis going forward is that manufacturing capex will be a probably stronger engine of growth over the next few years.
Ultimately people are talking of manufacturing as a percentage of GDP expanding and it is shown in this quarter number as well. Practically, the whole of the capital goods pack has delivered very strong numbers and people are talking of strength continuing deeper into the future as well. We are no longer only consumption driven. Consumption is slowing down but the other parts are doing well and there is something which is happening. We understand this has been a K-shaped recovery, so one section has done very well while the other section has not.
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Now the section that has done very well was probably you know ordering food at home before and now is maybe going out and having food. Now the same guys cannot do both and that is probably resulting in some sense of slowdown also till the well-being spreads to a larger section of the society which again I expect will happen in the next fiscal. So the economy as it strengthens is now the growth is touching a wider section of the population and I would be hopeful on consumption as well in the second half.
So by that premise, besides capital goods where is it that you find comfort enough to buy even at these levels or perhaps even add to the current positions?
There are lots of spaces. Capex continues in defence. Banks, versus earlier when people thought we were at peak numbers but it is a one quarter thing and then we will see lower margins, higher credit costs etc. Now banks are saying that the peak is probably two-three quarters away. So that space has corrected a bit and should be more investable.Similarly, chemicals is a very large pack but the larger names, where entry barriers exist are the names to look at, you know for some of them actually the future is rosier. Among the themes which were there, consumption is facing problems of slowing demand and high valuations. That pack has corrected.
Coming to autos, for a long time, there were concerns on transitioning to EV and then nitrogen fuel cells as well as capex intensity. In the interim, new winners are emerging. Every large company has shared the EV plans. It is not like people are fighting which technology will win and positioning; people are rolling out all platforms both on the two-wheeler side and on the auto side. The space benefits from very strong margin uptake because of lower commodity input prices. That again is a space where concerns are receding and the tailwinds are emerging.
What are you buying and selling?
What we did as a house was to sit together and identify narrow themes. So in terms of differentiation, we still believe in lending. We need to be with banks but maybe incrementally some money should go into NBFCs as well. We had a defence allocation for the whole house.
In China plus one we thought chemicals are probably a better way of investing there. In healthcare, we actually thought hospitals are a better way of investing versus branded generic or generic-generic businesses. In technology while the bulk of the allocation is still services, we are underweight technology but not by much. We are saying that the new age tech companies are now de facto good businesses at good valuations but are in weak hands. So we are starting to definitely nibble there. That gives us a sense and so as a house, all of our funds are now being positioned in these spaces.
What is your take when it comes to China plus one factor? Which sectors do you believe that this could aid?
Textiles are benefiting from that but textiles are the larger commodity influence. Chemicals have been my personal go-to sector in China plus one for a very long time. A very long runway of growth with good margins and good sustained ROCs.
Otherwise, the PLI scheme beneficiaries are also beneficiaries of China plus one and so there is a combination of China plus one and PLI but there are too many companies coming in and two one is not sure of the entry barriers. It is more to do with who one is able to partner and so on. That is receding in the order of preference frankly.
In the meantime, I wanted to get your opinion on new age tech, given that we have seen some of these companies as well bounce back just a quick take here.
We believe many of these companies are great businesses, good valuations but have weak owners. Ownership changes will cause volatility in the stock price and one should size the positions well but at the same time it is a good time to look into that space. Many of the brands may be stronger than the strongest of the brands we know of.
Those brands are stronger than any other brand in the country. Many of these are now one player, two players, three players kind of businesses and in the marketplace. While there can be theoretically a disruption, as of now, it is a very strong position that some of these winners have in the marketplace and the path to profitability is being shared by practically everybody. It is no longer that I made a loss of Rs 100 last year and this year I will do Rs 200 and the next year I will do Rs 300. The story has now changed to yes I made a loss of 200, next year probably I will get to EBITDA breakeven and the year after maybe PAT breakeven. So that is interesting.
All of them are PE sponsored businesses. It will start to make sense if the losses of the past somehow replicate into profits of the future.