IT & healthcare sector recovery is a reversion to mean than a secular trend: Ravi Dharamshi

Ravi Dharamshi, founder and chief investment officer of ValueQuest Investment Advisors, emphasises his positive stance on domestic-oriented companies/sectors, including manufacturing, power, power ancillaries, consumer discretionary at the higher end, and financials.

Ravi Dharamshi, founder and chief investment officer of ValueQuest Investment Advisors, advises steering clear of export-oriented sectors due to the global economic downturn. He maintains a bullish outlook on financialisation, manufacturing and consumer-oriented sectors. Additionally, he expresses thematic optimism towards energy transition, especially in power ancillaries. Dharamshi notes that the budget reaffirms this sentiment through its support for rooftop solar, rural housing, e-buses, railways and defense indigenisation. In an interview, the CIO emphasises his positive stance on domestic-oriented companies/sectors, including manufacturing, power, power ancillaries, consumer discretionary at the higher end, and financials. Edited experts:

What really stood out and what was amiss in this budget?

I think, first of all, we have to put it in context that this was a vote-on-account interim budget. From that perspective, it meant there were absolutely no expectations that there were going to be any big-bang announcements. Having said that, what we still continue to expect is that there will be fiscal prudence and policy continuity, and I think the government has delivered on both those counts. Last year, the capex growth was very strong. On top of that high base, we have seen around 16-17 percent capex growth. Of course, the execution lagged a little bit last year but still, 16-17 percent on top of a 32 percent kind of capex growth is very, very credible. So we see policy continuity and fiscal prudence and I think the confidence that the government is exuding and actually leaving some elbow room for the private sector to pick up the gauntlet in terms of doing capex, I think that speaks a lot. And they are actually bringing the cost of capital down by reducing, by not crowding out the bond market. So I think from an equity market perspective, nothing big. But from a bond market perspective, there was a real positive surprise over there.

Do you think it is a rather lacklustre budget in terms of sector-specific announcements? Are you anticipating any pre-election rally?

This government has clearly been focused on supply-side reforms, and has been very averse to bloating the balance sheet or giving any kind of fiscal stimulus. Yes, post-COVID, the fiscal deficit kind of expanded. We brought a lot of off-balance sheet items onto the balance sheet. So actually, this 5.1 percent fiscal deficit (target) is equivalent to the, say, somewhere between 3.5 and 4 percent of the previous regime. So clearly, we are trying to maintain a strong balance sheet. And I think the experience of the world post-COVID has actually shown that this is the way to go about it. Every economy in the world is struggling today because of the fiscal stimulus they provided post-COVID and that led to inflation. I think the government has done enough on the fiscal discipline side to bring or keep the inflation down. Now it is up to the RBI (Reserve Bank of India) to actually provide the stimulus in terms from the monetary policy perspective for growth to pick up. I think it's a delicate balance that we are trying to achieve between being fiscally prudent, as well as maintaining growth. I think some powder might have been kept dry by the government so that sometime in the future even when the going is good, there may still be some engines that are not firing.

Exports, rural consumer—those are the things which probably will need to be fired up at some point of time for the economy to start firing at around 8-9 percent. It might not seem feasible today but it might happen. So I will not hold too much of a grudge that not enough has been done on the growth side.

Coming to the market side, can there be a pre-election rally? I think from that perspective, the budget is pretty much a non-event. Slightly positive, it turned out, as we have continued to maintain a strong balance sheet and remain fiscally prudent. That makes India a very attractive destination. I think the way we are positioned, the FII (foreign institutional investor) holding in the Indian equity market is at a decadal low. So going forward, of course, the worries have been on the valuation front, but I think increasingly it is becoming difficult for most people to ignore India. Not only are we fiscally prudent, we are stable in terms of policy and the political scenario as well.

Of course, there is this one bit of small uncertainty—the elections are up ahead of us. But from the looks of it, from the assembly elections, from the way the budget has been presented, it looks like markets are expecting political continuity, give or take a few seats here and there. If that is the scenario, India will become a magnet and attract a lot more investments. Whether the rally comes pre-election or not, I have no idea, but we should remain strong, and I don't see any reason for us to substantially de-rate from here. How much money we can attract and how much re-rating further from here, that remains a question.

What are some of the key themes that you're bullish on and looking to play this year?

We are in the early stage of an economic revival driven primarily by capex and that capex has primarily been driven by government till now. Our orientation post-COVID has been more towards domestic-oriented companies or sectors that have domestic cyclicality. Manufacturing, power, power ancillaries, consumer discretionary at the higher end of the spectrum and financials—these are the proxies to the domestic economy. Clearly, there has been weakness in the global economy, so we have tried to avoid any export-oriented sectors. There have been, of course, instances where healthcare and IT have rallied a little bit from their lows, but I don't see a secular trend over there. They seem to be more like a reversion to the mean. So we continue to stay bullish on financialisation, manufacturing and consumer-oriented stories. And there is one theme that we remain bullish on, which is energy transition, which kind of cuts across a lot of sectors. But power ancillaries definitely feature over there. So those are the sectors and themes that we continue to like and I think this budget has kind of reiterated that because there has been a boost being given to rooftop solar, to rural housing, to e-buses, railways, defense indigenisation. Everything continues the way it was. The numbers might be up and down, but still the same priorities continue for the government and we continue to stay bullish on those same sectors and themes.

What's the one next big trigger for the markets? Of course, now, all eyes would be on the RBI policy meeting on February 8. Do you expect the central bank to change the stance anytime soon, cut rates? Any kind of direction on that?

No, I think the tightness in liquidity is something that the RBI should be addressing. We are actually trying to curb inflation by keeping liquidity tight. And I think once the RBI gets the confidence that the government has done enough on the fiscal discipline front to keep inflation down, it should move in tandem and try and ease liquidity. So I'm expecting either some open market operations or some CRR (cash reserve ratio) cut, those kinds of that will actually bring the markets back. And I think the banking sector, which has not been doing very well, should come back in favour because of that.