DAILY VOICE: Ashish Chugh names 6 money-making themes for investors; smallcaps to outperform

I feel we are in some kind of a trading market currently, where there is stock & sector rotation. The stocks are currently playing a catch-up rally.

This kind of market provides an opportunity for portfolio rejig – getting rid of the duds, and junk & align the portfolio to long-term opportunities.

The number of stocks in single-digit PE multiples, and with dividend yields between 5 to 10% is one of the highest I have seen in many years.

Q) India has seen a new breed of “Robinhood” Traders with huge growth in Demat & Broking accounts. How do you look at this trend?

A) The number of new broking and Demat accounts opened in the last two months has indeed surprised many. It is indeed good to see increased retail participation in equities since India is a hugely under-penetrated market.

However, what worries me is the reason many of such investors have chosen to invest/trade in stocks - the nationwide lockdown, and people not having anything better to do at home.

Many investors are first time investors & early success leads to complacency. That’s the worry. One must understand the fact that the stock market is not an easy place to make money.

You may get lucky once or twice but not all the time. Markets may be volatile at times and money made quickly can go away more swiftly.

Many of these investors are merely chasing stock prices without much understanding of company fundamentals & valuations, which can end in pain. Many may end up losing money & gaining experience if they are not careful with their money.

The ideal thing for a new investor would be to go through a Mutual Fund or professional money manager while keep a small amount to venture directly and learn the nuances of the market.

Q) Which themes or stocks look good for investment?

A) I have always followed a bottoms-up approach to investing in stocks – however, would avoid talking about specific stocks here.

I believe India is a stock picker’s paradise – one has to be nimble-footed with a flexible approach to investing & willing to have a diversified portfolio.

The selection of sectors & stocks is a very personalised thing, and should be aligned to one’s own DNA aka – ‘Temperament’ as well as ‘Risk Appetite’.

I think small-cap as space looks to be best placed where one can find growth opportunities at reasonable valuations.

There was a deep correction in small caps from January 2018 onwards and COVID-19, lockdown, and the damage it did to businesses led to a further correction in the valuations of most companies & small caps was not an exception.

I would broadly look at the following themes for investment:-

PSUs:

There are lots of PSUs, some being monopolies that are available at single digit PEs & dividend yields between 5 to 10%. Some of these companies fall into the Non-Discretionary category & many not get impacted much.

They are available below Book Value, much below their IPO price & near multi-year lows. However, from the valuations at which they are available, they are definitely not the flavour of the markets. Some of these provide good investment opportunities.

Rural Themes:

Rural markets are the ones that are less impacted due to lockdown & the initiatives of the government to increase farm incomes have led to revival of demand.

Some sector which could benefit are two-wheelers (look for ancillaries in this space), Building material, Asbestos Sheet, Fertilizers, Agrochemicals, Farm Machinery & Consumer Durables.

The effort should be to look out for reasonably priced growth companies & some of these may be worth considering post Q1 numbers.

Defence:

This is a space that offers exciting opportunities & our allocation to the sector could be significantly higher given the geopolitical factors. The obvious names are some of the PSUs which have staged a smart rally of late.

However, there are many smaller ancillaries having their own niches in the space. Some of these could provide good opportunities

China Import Replacement Theme:

Atmanirbhar Bharat may see the resurgence of industries where the majority of products used to come from China. We may see discouragement to imports & some entry barriers in those product segments.

Some spaces where India is equally competitive are small Batteries, Building materials/ Ceramic & Vitrified Times, Electricals.

Knowledge-Based companies where India has an Advantage due to Intellectual Capital –

Software & Pharma could be sectors that are less impacted due to lockdown because of COVID. There would be lots of opportunities here but one needs to know his company well, be mindful of valuations & momentum in some of the stocks since most of the pharma stocks have seen a major run-up in the last 2 months.

Though long term potential is good, buy on declines would be a better idea since not all of them make drugs for treating COVID & June quarter numbers may cause a correction in many.

Debt Restructuring/ NCLT Cases:

The IBC Amendment Ordinance 2020 which was introduced for default after lockdown declaration has come as a breather for many companies that were facing difficult times.

Many of such companies may be able to negotiate with the banks and restructure their loans. Some of them can multiply wealth.

However, deep research capabilities would be needed in such cases since many would be high risk bets and can potentially be write-offs.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.