Where do you see an attractive margin of safety and risk reward in your favour?
While the valuations are such that there is no room for error in terms of execution by various companies across the board, there are still lots of pockets which are benefiting from various initiatives taken out by the government and also the macro trade wins.
For example, the capital formation in India has been very low. The investment has been pretty low during the last decade. Now it is inching up across corporate India, across the public sector units, government and also from the household investment rate, the capex in terms of real estate housing demand. It is a broad brush theme that is really playing out and the entire value chain across building materials and other consumer products are going to be big beneficiaries. The corporate capex that we expect to see in the next five years along with the government push on various infra projects and the PLI schemes. The government has done a lot of work on raising capital through divestment and other stuff which is playing out at this point of time.
The economy is seeing a lot of job creation over the last couple of quarters. Consumer incomes are going up and that is going to be basically used for spending whether it is into capex through household, etc, or through other consumer discretionary items. The Indian economy is going to benefit from that.
The other big thing that is playing out is the government’s focus on manufacturing because that is where a lot of jobs are created. The PLI schemes are really benefiting some sectors in India — some old economy and some new economy. India is probably going to be a big exporter over the next decade. The China plus one strategy which is playing out globally as the MNCs want to diversify the supply chain away from China, is also helping in industries like engineering, textile, auto components, forgings, small capital goods, etc,which are benefiting from huge exports.
That is why India’s trade deficit is not so bad today despite oil being on fire. We are very comfortable, given that the exports have picked up. There is an entire set of themes that could play out and valuations are definitely reasonable compared with three to five years’ opportunities. In the near term, one has to be cautious. There could be some corrections but broad brush, manufacturing and the new-age tech are big areas.
What kind of themes do you like in midcaps and smallcaps, which still have steam? Lots of small, midcap companies are buzzing and overflowing with orders across sectors?
About 80% to 90% of Indian corporates are still midcaps and small caps, barring the top 50-70 companies. So, there is a huge amount of opportunities ahead of us in terms of the consumer discretionary space.
Look at the entertainment companies, look at the hospitality sector, look at various building materials and home improvement solution products. These are essentially the big market small cap segment. One of the big areas that is emerging is the housing market. In India, we have had a big consolidation of developers in the last two years.
We also went through the Covid uncertainties. The industry is consolidating from an unorganised place into listed smallcap, midcap companies. Among real estate developers, except one or two, most are midcaps and smallcaps. If we look at the kind of demand that is visible on ground for housing units at this point in time and given the low interest rates and the affordability, there is a huge amount of upside that could play through the developer space in the midcaps and the small caps.
In auto, the threat of EVs has been real and two-wheelers would see a lot more disruption. But a lot more will happen over the four-wheelers and the commercial vehicles. It will take a little bit more time for that to happen. In spite of that, there are a host of auto components companies which have been beaten down in the last two years and are now available at very reasonable valuations. They are able to tie up technology or develop technology in house to be able to cater the large growing demand of the new gen cars. That is a space one should definitely watch out for .
The third basically is the textile industry. We do see that the global demand recovery is very sharp and sustainable as the global economy gets back to normalcy. We are again replacing China in a big way. We are exporting brands globally. Textile is one place where a huge amount of value capture could happen.
How do you see Reliance changing its complexion into a new energy company? They have made three back-to-back acquisitions in the solar space and people are finding it hard to analyse it. What is the potential here?
A decade back, they got into consumer facing business like the retail and before that the telecom through Jio. We can see how they have built value over these two verticals. Similarly, the global shift that is happening in terms of renewable energy has a huge amount of potential that is waiting to be unlocked in India, given the kind of the land area that we have and the availability of solar or sunlight through the day.
India geographically is placed very well to benefit from solar power and it is the ambition of the government to multifold increase renewable energy in the next 10 years. So Reliance’s ambition fits very well there. When you want to set up four gigawatt of solar capacity in the country, you cannot import all the solar panels and equipment; you need to make it in India and that is a big space where again job creation is going to happen. Reliance or even other corporates that are listed and unlisted are making huge bets on end to end technology access across the solar space.
So we would see definitely potential in terms of market cap accruing to such players over the next decade. Definitely that is another big area where one should be focusing on though the number of listed players is very limited in this space.
On broad-based rerating in the Tata Group
It is a part of a big strategic re-shift that has happened with the Tata Group. They have been an old economy group and they have been focussing on the old business. But in the last two-three years, they have taken some key steps to take advantage of the emerging technology like AI, machine learning on the software side and in terms of development across the electric vehicles value chain, across the charging infra, making EVs. They have done a lot of things and it is coming through that the entire value chain is geared up for the new economy. Not to forget, the consumer businesses have been consolidated and some of the units have shown aggressive growth. A whole lot of things have been happening at Tata Group. The new management has helped the changes.
