Do you think there is scope for PE multiples not to expand further in consumer names?
Many consumer stocks are trading at possibly 40 to 50 times or even more so. Investors would have to be far more selective here than the IT sector as far as paying attention to valuations are concerned.
We must also remember that the consumer names have always been expensive and India is a market that rewards quality. If you want high quality companies that are likely to have sustainable earnings estimate upgrades and companies that have significantly higher ROE, companies that are consistent compounders, than the investors would have to be prepared to pay a valuation premium. In the consumer names, investors would have to be selective but at the same time, the top run companies which are able to pass the cost increases to their customers would continue to remain in focus.
About a month ago, you conceded that while the stars were getting aligned for the market, the straight line rally has taken you by surprise. As you go overweight on India, what are the new sectors you are looking at? In the past you have spoken about IT and financials?
IT and financials continue to remain as core overweight in our Indian allocation in the Asian model portfolio. We have also increased exposure to the auto segment and this was about a month to month and a half ago. It has paid significant dividends in terms of outperformance compared to other Asian peers. We also like some of the commodity plays. Some of them are conglomerates with exposure to oil refining, telecommunications and what have you. But in general, the commodity plays, auto plays and the top rung consumer discretionaries are possibly the sectors I would highlight, in addition to IT and financials that you already talked about.
Why do you continue to bet big on the auto sector? Is it because a lot of them are getting into hydrogen and green energy or do you see genuine demand?
The clear economic recovery has taken us by surprise. For most market participants, it has worked that way that after the second Covid wave expectations had been beaten down both in terms of economic growth and in terms of earnings growth expectations. The outcome took everyone by surprise. We think that that is likely to continue for longer.
We are already seeing that percolating down to domestic demand. There are quite a few supply side measures that have been adopted by the government. It has not been very actively discussed in the international press and the impact obviously will be long drawn out. It is unlikely to happen right now but these are some of the things that would percolate down to investments as well.
We think that after about seven to eight years, we are now entering a capex cycle. We are entering a period of domestic demand revival though the bottom of the pyramid still needs some work in terms of economic incentives. Broadly, these have contributed to a broader economic growth which was un-anticipated even a few months ago. Those are the factors that lead us to remain positive on the sectors that I highlighted and it is clear that they are also getting reflected in earnings estimate increases across a wide variety of sectors that I earlier talked about.
