In an interview with ETMarkets, Khemka said: “These sectors tend to offer lower but secular growth when compared to certain cyclical industries like auto and industrials which offer high growth I upcycle and declines in downcycles” Edited excerpts:
We are in September and Sensex & Nifty50 hit fresh record highs. What is fueling the rally on D-Street or is it just a liquidity wave?
While liquidity is one of the factors that is keeping the indices at elevated levels, we believe it is also worth noting that household savings are diverted from bank deposits to capital markets.
Furthermore, while 1QFY25 earnings were largely below expectations, we observe that earnings growth expectations for the remainder of FY25 is relatively higher. Any further disappointment in earnings growth could lead to a correction in the indices.
What drives the rally in telecom, infra and capital goods stocks? They have rallied 20-30% in the last 6 months.
We believe that the Telecom sector is finally seeing a revival in ARPU which has been historically an issue for investors. Improvement in pricing for their subscribers will lead to better margins and RoEs for telecom companies and hence the recent rally is discounting that eventuality.
Infra and Cap goods have been doing well on expectations of high government and private capex. We believe this rally is partially justified as capex numbers are growing in double digits, however, execution of the order book is going to be a stock-specific challenge.
With markets trading at record highs – IPO season has picked up pace. What is your take on the companies that got listed in sectors such as fintech, EV, tech, e-commerce etc? Have they added more flavour/broadened the horizon on D-St?
There have been multiple IPOs of fintech, EV, tech and e-commerce companies over the past 3 years. We believe that such stocks enable investors to invest in the long-term trend of digitization and financial inclusion.
However, InCred as a house looks at the most critical variable of the path to profitability in such themes. We do not expect all these businesses to turn profitable soon, some may not even survive over the longer term. Hence, we are very selective in these buckets.
SEBI has also raised some concerns around SME IPO – what are your views?
Going by historical trends, it seems that SMEs are in a euphoric zone of valuations. We believe SME stocks deserve to be cheaper than their larger scale peers as business mortality and obsolescence is high in such scale of businesses. We at InCred do not invest in SMEs.
Where is the sector rotation happening? Where is smart money moving?
We believe that smart money has started moving towards growth defensive like Healthcare, FMCG and IT.
These sectors tend to offer lower but secular growth when compared to certain cyclical industries like auto and industrials which offer high growth I upcycle and declines in downcycles.
We are not surprised to see this rotation as growth numbers in other sectors have disappointed in 1QFY25
Which sectors are you overweight and underweight on?
We are overweight on healthcare, IT, and FMCG. We are underweight on financials and industrials.
Considering the fact we are trading at record highs – let’s also talk about valuation. Are we ‘expensive’ compared to the global peers?
When compared to other emerging markets, Indian equities look more expensive now. However, we also have top quartile RoE, growth and currency stability. Hence, from a global perspective, the rich valuations are supported by improving fundamentals.
What is your take on commodity stocks?
We believe commodity stocks do well in economic upcycles. We do not foresee a significant surge in global economic growth even if the Fed starts cutting rates as inflation would probably offset the growth partially.
The unstable geopolitical environment can also cause spikes in inflation and hence risk reward doesn’t seem to favor commodity stocks at this time.
The IT Index is at a record high in August. Can this rally be sustained at a time when there is some chatter about a slowdown in US growth?
We believe that the IT sector will do well in the near to medium term as US economic growth is likely to be stable and Indian tech companies would have a good role to play in digitization and modernization. We see valuations as a little demanding at this point, however, there are pockets of value as well.
What is your view on the PSU theme which was right on top in 2023 but witnessed some selloff in 2024?
We at InCred are very selective in PSU stocks largely owing to the unpredictable governance/strategy adopted by these companies from time to time.
The stocks have seen a significant rerating considering the current government narrative, however, if earnings do not support the narrative, there could be a significant downside to these stocks.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)