Banking, auto and capital goods can be the new pack of wolves for the next 3 to 5 years, suggest PMS AIF thought leaders

From being a quiet part of our lives, equity market assumed greater importance with the onset of the coronavirus pandemic. COVID-19 packed the Indian population indoors, which resulted in more and more Indians actively looking at the stock market as a source of generating secondary income. Retail investments gathered momentum and the Indian equity market was flush with liquidity.

Buoyed by this liquidity, stocks — all and sundry — moved up. Shares of many companies that were hardly traded, suddenly jumped to life, valuations skyrocketed, and people invested in the market out of ‘fear of missing out’ (FOMO). All this led to an unprecedented bull-run in the Indian market that lasted for close to 18 months.

Then, as is the law of nature, everything that goes up has to come down, and the same happened with the Indian market as well. The euphoria gave way to panic as the market tanked. Bruised and battered, many first-time retail investors bit the dust. But since they had already tasted blood, they took to the mutual funds route in order to remain in the race. That’s how when foreign institutional investors (FIIs) have been rushing to the exit door, domestic financial institutions (DIIs) are pumping in money that they have mopped up from retail investors.

Clearly, equity markets have caught the fancy of retail investors more than ever. But what next? This is the theme of the PMS AIF World’s 3^rd mid-year summit that started on July 8.

PMS AIF World is a new age investment services platform focused in the space of alternates for those HNIs who are looking to do analytics & knowledge driven good investments.

“Equity is in the air – but what will be the growth engines / sectors in the coming months?” This was the question being asked to the panelists.

Anirudhha Sarkar, CIO and Portfolio Manager, Quest Investment Advisors, is betting on India’s domestic story, putting all eggs on India’s domestic consumption. According to him, India’s banking and financial sector can soon see the next cycle of growth. This is simply due to the fact that if India has to become a $5-trillion economy, the country’s banking and financial sector will play a pivotal role in achieving that goal.

The valuations of almost all the banks have witnessed strong corrections and are trading below their 10-year averages. However, the banking sector has come out strongly after the pandemic and credit growth has seen a strong pick-up.

“The housing loan space is witnessing strong traction which makes me bullish on the real estate sector,” Sarkar added. He believes that India’s property cycle has a long runway to grow after a prolonged bad patch of the last six-seven years.

“The demand for real estate continues to be strong and has not yet shown any signs of tapering even after the interest rate hikes,” said Sarkar.

Sarkar’s third bet is the automobile and auto ancillary sector, which is part of the India consumption story and is witnessing strong demand not just in passenger vehicles but also in other segments. With commodity prices cooling off, the companies which had taken price hikes will see their margins picking up in the near term.

Vikas Khemani, Founder, Carnelian Asset Advisors, concurred with Sarkar as he is also bullish on India’s banking sector. He believes that with the clean-up of the banking sector, India’s credit cost has structurally gone down. This will result in the rise in profitability of the sector even though margins may take a hit.

The second theme Khemani is positive on is India’s manufacturing sector, especially with the government’s push of making India self-reliant, and the ‘China Plus’ strategy being adopted by global players, which has created strong demand in exports markets that is much higher than earlier. “Also, India is more cost competitive than China, with India’s labour cost at $250 per month compared to $750 per month in China,” Khemani said.

India’s manufacturing sector currently contributes 16 percent to its gross domestic product (GDP) and the government has kept a target of taking this up to 25 percent of GDP. According to Khemani, even if this target is made more conservative and brought down to 20 percent of GDP, the contribution from the manufacturing sector will jump from $450 billion currently to $1 trillion, which will see the manufacturing sector flourish.

If the manufacturing sector witnesses this boom, the other sector that will gain prominence, according to Khemani, is the capital goods sector. To achieve the desired manufacturing growth, India will have to significantly increase its capex (both government and private) and the direct beneficiary of the increase in capex would be the capital goods sector.

Rajesh Kothari, Founder & MD, AlfAccurate Advisors, seconded this thought about capital goods as he feels that apart from the traditional areas of railways, irrigation, power, and road construction, there are new growth areas which have come up and which will witness humungous amount of capex in the coming times.

Kothari is of the opinion that the growth in capex will be driven by data centres, renewable energy, robotics & automation and efficiency-driven capex. He believes that the capex in data centres will be to the tune of Rs 50,000 crore over the next five years. Robotics is another area which can witness huge capex given the fact that there are only six robots for every 10,000 workers in India compared to 100+ robots in other emerging economies.

Kothari, like Sarkar and Khemani, is also bullish on the banking and auto sectors, besides on the specialty chemicals space, as this sector has undergone a structural change and is witnessing strong traction in orders from global customers. Indian specialty chemical companies are undertaking huge capex with an eight- to 10-year horizon, and this will be based on the forecasts of long-term orders from their customers.

In a nutshell, the three panellists have a consensus bullish view on banking, automobile and capital goods sectors, and believe that these sectors can be the new pack of wolves of the next bull-run.

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