Things seem favourable. Prime Minister Narendra Modi has given a GST bonanza going by the Independence Day speech. Nifty has touched the 25,000 mark. Are we entering into a phase where select high growth counters will do well?
Alok Agarwal: Certainly, the GST rate rationalisation that was announced over the weekend is welcome news and it was a much needed support for stimulating the economy. Over the last few months, RBI has been taking a lot of steps on the monetary side. Earlier, the government had taken some steps through direct tax adjustments and making a lot of regulations easier as well. But what was required was the stimulus on the fiscal side to ensure that a proper stimulation of consumption happens at the broader level. The suggestion given by the government to the group of ministers to rationalise the GST rates would go a long way in ensuring that the consumption stocks and consumption companies and sectors will start doing well.
Since we are talking about a very strong structural growth story, I want to understand what is the way ahead in terms of sectors which you were underweight and where now you want to raise up the bar; also sectors where you are looking at good valuations and time for a longer structural story to be in the portfolio as well.
Alok Agarwal: Certain sectors have been slowing down and are still not showing too many signs of growth. Those remain underweight – the likes of IT, FMCG, and to an extent, oil and gas as well. But the sector that is the most structural sector in India has typically been the consumer discretionary. In the short term, it was showing some kind of a slowdown and now with this GST rate rationalisation, it should start showing a pickup.
A lot of newer sectors which were not really part of the frontline indices, have been doing pretty well. The likes of electronic manufacturing, hospitals, realty, consumer durables. A lot of those segments have started coming back very well and we are quite overweight on those segments that are growing at a faster pace and have a great visibility of growth as well.
Having said that, a lot of technology-oriented platform companies have started coming in, be it in the fintech space, insurance space, consumption or food delivery. A lot of those companies may not be really part of the frontline indices but they are really growing at a good pace.
What is your view on the financial sector? Do you think there will be an indirect benefit to banks and even NBFCs?
Alok Agarwal: The whole market has been waiting for these segments to start growing and we have seen that the credit growth and deposit growth has not really been picking up. They have been hovering somewhere around 10%, which is quite a sub-optimal number to have. Given that the rate cycle that we are in, a lot of these banks may still have some more way of NIM pressure to be seen, but yes, with consumption growth likely to pick up, that is likely to have some positive impact on deposit and credit growth as well.
We remain selectively positive on the lender side, but within the financial space, we are more positive on the capital market plays and the whole value chain right from the exchanges to the wealth managers to the asset managers and to select brokers are all showing a very good growth and visibility of growth as well.
How are you placed so far as midcap and smallcap and the broader market is concerned? What kind of narrative is going on over here now? Are these particular market caps going to lead the rally or is it the time to bank more on largecaps since we have seen a change from capex to consumption and it is good to go with the leaders? What is your take?
Alok Agarwal: There are two types of narratives in the market. One says that the largecaps are at 21 times one year forward valuation compared to midcaps at 27 times and hence largecaps are cheaper, one should be in largecaps. Coming to valuations in the context of growth, the growth numbers are much higher in the slightly broader markets on the midcap space due to which on a per percentage growth basis as we call as PEG ratios, the valuations don’t seem too high.
So, instead of segmenting the markets into the large, mid, and smallcap basis, the better way would be to see what among those sectors and segments are growing better and those sectors actually currently happen to be more in the midcap space. We named a few of them, the consumer discretionary, chemicals, the agrochem as well, fertilisers, some real estate names, EMS companies, hotels, hospitals, exchanges and the whole capital marketplace as I mentioned. A lot of these names happen to be in the midcap space. The larger caps are dominated by sectors which are not growing at a great pace. So, focusing on the growth and the segments and cohort of companies that are providing that growth would fetch us better results instead of focusing too much on the market cap divide.
One sector which has been in focus for the past two days is the auto sector and that has got renewed interest ever since the GST announcements were made and this sector is expected to be a major beneficiary. What is your expectation? How should one navigate the auto sector?
Alok Agarwal: That is perfectly true. The auto sector is the poster boy of consumer discretionary play in India. It is one of those rare sectors where predominantly almost the whole market is in the formal zone. There is no informal zone there. The bulk of the vehicles faced around 28% GST. If a lot of them come to around 18% or so, it would be quite a relief for the consumers and the price elasticity in that segment will also be pretty high. That is expected to generate volume growth and hence that should be positive.
We are positive both on the auto as well as on the auto ancillaries because once the volume growth picks up, the whole engine on the supply chain on the ancillary side also picks up. So, we remain positive on that side of the auto segment.
What about chemicals and fertilisers? Since chemicals as a sector is also having a structural change in terms of new proposals and reforms, how are you placed in your portfolios?
Alok Agarwal: Barring those which could be directly impacted by some imposition of tariffs, other than that, a lot of these chemicals have started showing some decent growth numbers coming back. We have had a period where after a very high pace of growth, a lot of these companies went into capex and hence the consolidation of earnings was underway for the last few years. But now, if we look at the last few quarters as well, the chemicals pack has started showing good double-digit growth as well. So, we are quite selectively positive on those segments where the visibility is high, especially among specialty chemicals names.