Growth and cash flows will come from outlier sectors: Kenneth Andrade

Kenneth Andrade, founder and CIO of Old Bridge Capital Management, said that a new market cycle is taking shape. (Illustration: Suneesh Kalarickal)

Growth in the economy and cash flows of tomorrow will come from sectors that are significantly different from the major sectors of today, said veteran investor Kenneth Andrade in a media interaction today.

“The future is not going to be the past,” said the Founder and Chief Investment Officer of Old Bridge Capital Management.

Towards this new future, Old Bridge is betting on a few themes– select manufacturing, commodities, energy-related sectors, urban consumption, agri products and digitisation.

Why these sectors?

Historically, manufacturing and commodities have been non-performers, he said. Therefore, “their valuations and business models have been overlooked”. But now, opportunities will arise in this space “to feed into the global supply chain, as the world’s largest manufacturer runs into multiple headwinds”.

The strategy for this sector would then be to “tap niche manufacturing segments in India that have established global cost leadership”.

Also watch: Wizard of the Dalal Street: What makes Kenneth Andrade tick?

This growth in manufacturing and commodities, which are “extremely energy-intensive”, leads to his second theme–of energy-related businesses. These businesses will also do well because utilities are set to transform with incremental capex made being in alternative energy, he said.

In urban consumption, he sees opportunities in businesses that can tap into wage increases in certain sectors such as tech and financial services. Also, with new business models evolving, survivors of this economic slump will come out shining with a healthy cash flow, he said.

“Agriculture has been underinvested globally for the last 20 to 25 years, and it will bounce back sharply,” he said. He sees inflation in agri products and valuations that are fair even as companies’ profitability are at an all-time high.

While agriculture seems attractive to him because of fair valuations, the digitisation theme seems attractive to Andrade despite the expensive valuations. It is a profitable segment to be in, despite the valuations, he said. “All of these companies are in a hyper-growth environment, though growth will favour companies that have a B2B or B2G (business to government) strategy,” he said.New cycle begins

Andrade’s firm focuses on identifying businesses early into a market cycle, and he reiterated what he has been saying for some time now–that a new market cycle is taking shape. “The cycle may even be its infancy,” he said.

To illustrate that, he shared consolidated numbers of NSE 500 companies from FY99 to FY21. Debt-to-equity ratio has moved from 1 to 0.7 and asset turnover ratio, from 0.7 to 0.6, indicating balance sheets that are highly develeraged and capacity utilisation in its lower range of 60%. Therefore, companies have more room to raise debt and to expand their facilities.

“This is the best balance sheet I have seen of corporate India… if growth comes by us, companies have free capacity and the financial capacity to take debt,” he said. The RoE does stand at a lower 11% but that was because “we lost two quarters to the pandemic”.

“In the near term, higher realisation will lead to a reasonable amount of profitability. In the longer term, these (the lighter balance sheet and free capacity) will be a big support for profitability to go up and for the ability of companies to invest back into their businesses.”

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