Manufacturing, allied sectors the best investment opportunity: Anand Shah, ICICI Pru AMC

Anand Shah

Manufacturing and infrastructure presently offer the biggest opportunity to investors, says Anand Shah, head of portfolio management services and alternative investment funds at ICICI Prudential Asset Management Company. In an interview with Moneycontrol, he also said he expects the Nifty to hover around the current levels. Edited excerpts:

What is your expectation of the Nifty, going forward?

Owing to the EPS (earnings per share) doubling over the previous 18 months, the Nifty valuation has declined broadly. The current valuation is approximately at 20 times trailing profits compared to April 2021, when it was about 33-34 times trailing earnings. Therefore, even with a de-rating and a reasonable profit growth rate of 10 to 15 percent, the Nifty level is likely to hover around current levels. When it comes to our portfolios, these differ vastly from Nifty and hence, their levels do not concern us much.

Even if the Nifty valuation has come down, valuations of many constituent stocks are at a premium to historic levels. Why is it so?

There are two categories of businesses. One category is the B2C (Business to Consumer), which has prospered greatly over the past one-and-half decades. This occurred at a time when a sizable portion of the economy was struggling, especially B2B (Business to Business) businesses. We believe this is one segment that will continue to do well. However, struggling B2B industries like manufacturing and infrastructure have now rebounded.

This is because China was exporting deflation to the rest of the world, which was beneficial to B2C companies but detrimental to B2B ones. As a result, B2C companies’ margins and PE (Price-to-Earnings ratio) increased. Meanwhile, PE for businesses in the manufacturing sector fell. Of late, China has placed more emphasis on the environment. There, the cost of labour is rising. Additionally, their manufacturing is less competitive than it was a decade back. For B2B enterprises, this is fantastic news.

We have seen lockdowns and growth slowdown in China. So, is it a long-term benefit for India or just a short-term one?

Because the global GDP (Gross Domestic Product) growth rate is slowing down, it is negative for everyone when an economy like China's weakens. So, if China opens up, everyone benefits.

Most of the expected earnings growth is coming from BFSI (Banking, Financial Services and Insurance). Beyond that, growth is likely to slow down, especially for commodity-led sectors. So, how do you see portfolio allocation in that scenario?

We are overweight on banking. We believe metals prices will recover in FY23 and continue to perform well in FY24 and beyond. The sector's sluggish growth benefits intermediate metal customers like automakers and engineering firms. After almost 10 years of no private sector capex, these manufacturers are now undertaking capital expenditure.

Is this the right time to invest in these businesses?

Although we believe there are pockets of opportunities in this space, any investment must be made in a staggered manner, after conducting research. There may be volatility in the short term, but segments like manufacturing and related industries like capital goods, logistics, infrastructure, utilities, and banks represent a long-term opportunity that India in the past has overlooked.

Manufacturing-related recovery will significantly benefit banks. Additionally, as the manufacturing industry’s capex cycle gets underway, banks will have opportunities to lend to that industry. Therefore, manufacturing is very beneficial to banks, but the main question is whether India will get its fair share of manufacturing, considering the size of our labour force.

Ahead of the upcoming Union budget, what kind of infrastructure companies would be tactical plays at this time?

We consider railroads as a huge opportunity. Apart from the dedicated freight corridor, there are numerous capex projects underway. Then there is urban infrastructure; metros are being built in every city. Another possibility is renewable energy, including solar and wind energy. Going indigenous has opened up a wide range of opportunities for the defence industry.

Can banks experience a growth slowdown from FY24 similar to what metals are experiencing now after a boom?

We believe banks are in a strong position. With many people purchasing homes, retail loan growth is robust along with the opportunities manufacturing growth presents. Today, NPAs (Non-Performing Assets) are no longer a cause of concern as they were during the 2016-2021 phase. Because slippages have decreased and borrower behaviour is anticipated to improve over the next two to three years, it is less likely that borrowers would default. NPAs should remain steady as a result.

In telecom, do you see growth coming from pricing power or customer acquisition?

Both. The top two players are consolidating their market share. Therefore, customers are increasingly choosing the top two. So, this provides additional pricing power and, in turn, customers are receiving ever-improving services.

In India, new-age tech stocks are still trading at a premium to their global peers despite massive selling. Is that valuation premium justified?

We have concerns about both absolute and relative prices. Globally, we are leaving behind a period of easy liquidity or easy credit. Since funding was available for invention, several innovations took place on a global scale. Because liquidity conditions are tightening, if the new-age companies employ the current capital in a way that makes them more sustainable, we believe some of them may succeed in the years to come.

The key is to increase self-sustainability and avoid returning to the market for liquidity. Understanding that you now need to stabilise the business model and make it generate revenue is one important adjustment for new-age companies after being listed.

What is your criteria for investing in companies?

First, the company ought to be expanding faster than the industry. Second, the company should have a moat or long-term competitive edge that will help it weather an economic storm. Sector consolidation is the third requirement. These three factors are crucial to each firm we invest in.

So what are you currently buying? And what precisely are you trying to avoid?

The economy is performing well overall. We are more optimistic about the total earnings growth rate now than we were a few years ago, when growth was under pressure. As of now, we prefer both B2B and B2B enterprises, but in the future, we may steer clear of consumer durables, consumer non-durables, and paints due to their high valuations. In essence, we steer clear of any sector or firm in which the PE multiples and the return on equity are declining.

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