Daily Voice | Here is why this investment professional is bullish on auto, power sectors

The valuation of the Indian equity market is expensive and it is overvalued by around 20 percent. This expensive valuation is well supported by earnings growth of 17 percent. India is undergoing an industrial revolution and is among the most promising growth stories of the coming decade. India’s internal consumption is high due to its population which in turn keeps the domestic sector always attractive.

There are sectors like banking which have only given a 10 percent return in the last one year despite its strong earnings growth of 20 percent. This makes the banking sector attractive. Other sectors like FMCG also haven't done good. Realty, auto & power have done well. Therefore there is mixed growth in the domestic sector.

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Export-oriented sectors like IT haven't moved much in the last two years due to macro-level concerns. The two-year return of IT is only 10 percent, which is poor and also makes this sector attractive from a valuation point of view. As liquidity easing starts happening in the USA, the IT & other export-oriented sectors are expected to do good.

Is it time to bet on divestment, especially after the government's focus on value appreciation of PSU stocks in the interim budget?

Despite the FY24 divestment target being reduced to Rs 30,000 crore from Rs 50,000 crore, it is unlikely this target will be met. The big reason for reducing the divestment target is higher non-tax revenue and dividends from RBI and state-run Bank.

However, the current high valuation of PSU stocks offer an attractive opportunity for the government to marginally dilute shareholding without losing control. Yes, this will help government to exceed the divestment targets set for Rs 50,000 crore FY25.

There is high expectation that government will not need extended divestment in next year, too, as dividend proceeds for PSU will be stronger in FY25.

Also read: More steam left in PSU stocks; will see healthy correction, says Sandeep Tandon of Quant MF

Do you still prefer the power space, considering the valuations and prospects?

The power space has given a good return and is ready to give an even better returns. This is because the power sector is set to become one of the critical drivers of economic growth. The main reason is large population and increase in economic activity. This will create more electricity demand and its short supply will create hype for companies dealing in the power sector. The most promising sector is renewable energy.

What are the triggers that the market is looking for?

The market has been rangebound due to FII selling or they have not been buying significantly because valuations are not cheap. The market is overvalued by 20 percent and that is holding the market to remain rangebound. The market has already discounted the winning of the BJP in the general elections. In case there is some change in the market reading, then things will readjust to reality i.e. will correct.

On the other side, for the market to rise further the easing of liquidity should happen in the Fed policy. When the Fed cuts interest rates, liquidity would flow to India as it is the sweet spot for FII to make investments.

Are you overweight on the entire auto and auto ancillary space or are you selective?

Major mutual funds which are diversified equity mutual funds have significantly good allocation in the auto sector. This is due to good earnings growth of around 90 percent despite the prices moving up only by 50 percent. The auto sector isn’t expensive to keep underweight rather keep 8 percent-10 percent allocation in Auto in sector spread.

What do you expect from corporate earnings for the March quarter and their commentary for FY25?

Material sectors like metals and cement have seen good growth due to reduced raw material costs, while the chemical sector has only seen single-digit growth. High growth was seen in auto, auto ancillaries, BFSI and lifestyle goods. IT continues to bear a slow phase.

Overall, Nifty YoY PAT growth was robust in Q1 & Q2 — 30 percent and 25 percent, respectively, and Q3, so far, is in line with expectation and grew at 34 percent YoY. Although the estimate was low, it got the boost due to domestic cycle growth, BFSI and auto.

The March quarter is also expected to be robust with the continued earning growth and FY25 will be fuelled by good past earnings, controlled inflation, good capex growth by the government and interest rate cuts by the Fed.

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