Rajesh Bhatia, Chief Investment Officer (CIO), ITI MF, thinks capital goods and telecom are must-haves for FY25 but is not sold to the idea of consumption space despite the talk of a bounce back in the new financial year.
Bhatia, who has more than 30 years of investment experience in Indian equities, said the recovery in the staples and consumption space, excluding high-end discretionary, was weak and elusive, with few signs of a recovery.
He said for capital goods and telecom, he was more inclined to companies with strong business models and lower risks of execution. Bhatia is also positive on the NBFC space. In terms of asset quality and growth, the non-banking firms have not disappointed at all, he told Moneycontrol in an interview. Edited excerpts:
Do you think the worst is over for non-banking finance companies (NBFCs) and is it the time to start accumulating them?
NBFCs are the primary weapon for the financial sector to reach the underserved. Banks would agree with this as we see a plethora of co-lending agreements between banks and NBFCs. What this effectively means is that NBFCs reach where banks don’t. To fulfil the motto of financial services for all, NBFCs are vital.
In the last one year, we have seen NBFCs underperform the general market. This is due to various reasons, including but not limited to margin pressures due to the rising rate environment. We believe we would see some of the margin pressures reversing as we gear up for the falling rate environment.
In terms of asset quality and growth, NBFCs have not disappointed at all, and we continue to see NBFCs growing at above system credit growth in the near term, while maintaining quality of the portfolio. Hence, we are positive on the NBFC space.
One would obviously have to pick and choose the right NBFC to invest in, depending on valuations but keep in mind, some of the NBFCs have evolved through the years to make a niche for themselves. In terms of overall innovation (digital and distribution), we have seen certain NBFCs outrank banks as well. We believe that whichever lender can maintain and grow market share by having that right to win, should do well in terms of stock price as well.
Is this the right time to take exposure to consumption space, considering the likely strong revival in FY25?
I think the recovery in the staples and overall consumption space, excluding high-end discretionary, seems to be very weak and elusive and there are few signs of a recovery. It does confound us that 1.4 billion people are unable to trigger growth in consumption in India. Be that as it may, I think it's very difficult to pre-emptively call this recovery because the markets have been trying to do that unsuccessfully for the last couple of years.
Neither do the valuations of these companies give us any comfort that if we get the upturn call right then we will make disproportionate returns. On the other, we are finding enough visible multi-year growth opportunities in other sectors, so we are focussing there.
Two sectors that you want to add to portfolio for FY25?
We are quite positive on capital goods and telecom. Of course, one has to do stock picking in these sectors. Given that valuations are elevated for the markets and for these sectors, we are gravitating to companies where we find strong business models and lower risks of execution, moving forward.
After the recent correction, do you find better risk-reward in the smallcap space? Have you changed your smallcap strategy after SEBI and RBI flagged valuation concerns?
The smallcaps category has more fast growing companies which are taking advantage of the India growth story relative to the megacaps. Corrections in smallcaps and midcaps are healthy and needed to eliminate froth. This may also provide good entry points.
We look for businesses that have strong business models, execution capacity, exhibit less volatility and offer steady growth. Exiting only makes sense if the valuations are excessively over stretched and/or earnings trajectory is unsustainable. We recommend the SIP/STP route for investment in small and midcaps.
No, we have not made any changes in the strategy, as the strategy we follow required no changes and we are in quite good position with them now.
Do you think FY25 will be a good year for the market in terms of returns and earnings?
We believe we are in a bull market. From March 2023, our view has been that market is broad based and lot of economically sensitive sectors have participated. To jeopardise this bull run, a meaningful risk needs to emerge.
We are also watchful of any emerging big risk, which can disproportionately impact markets, though we must admit these risks are elusive at the moment.
Disclaimer: The views and investment tips expressed by investment 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.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
