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Daily Voice | Here is why this portfolio manager is betting big on telecom, pharma and media

Vinay Jain of Karma Capital believes inflation, Fed action and the balance of payments will be critical in shaping the overall outlook

October 01, 2022 / 11:02 AM IST
Vinay Jain of Karma Capital

Vinay Jain of Karma Capital


Vinay Jain of Karma Capital says while the global economic outlook is bleak, with recession looming and inflation running high, economic activity in India remains stable.

The assistant portfolio manager at Karma Capital with 11 years of experience in capital markets expects telecom, pharma and media sectors to see significant strong earnings growth over the next two to three years.

"The larger banks are in a sweet spot where one can see credit growth and strength on the balance sheet," Jain tells Moneycontrol in an interview. He expects the media sector to see consolidation just like the telecom space and sees long term growth in domestic pharma. Edited excerpts:

Do you expect weakness in other currencies against the US dollar given the subdued global environment?

In the past two and half years, the world economy has suffered from a couple of huge shocks—the pandemic, a huge fiscal and monetary expansion, the post-pandemic supply side shock in which pent-up (and lopsided) demand hit supply constraints in industrial inputs and commodities and finally, it was Russia’s invasion of Ukraine, which hit the energy sector, particularly in Europe

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This has resulted in enhanced uncertainty along with strong inflationary pressure in the US and a need for monetary policy, particularly that of the Federal Reserve, to catch up and powerful recessionary forces, especially in Europe. The dollar has strengthened on a combination of other factors such as -

1) "Flight to safety" where the US is considered a safe destination by investors
2) "Home bias" with the US being home for the majority of investors

3) Dollar yields are rising and are expected to rise more because of monetary tightening by the Federal Reserve, the central bank of the US.

The recessionary forces emanating from the US and the rising dollar have come on top of those created by the big real shocks. In Europe, above all, there is a way in which higher energy prices are simultaneously raising inflation and weakening real demand. Meanwhile, the determination of China's leader to eliminate a virus circulating freely in the rest of the world is hitting its economy.

In an anxious world, the dollar has traditionally been a symbol of stability and security. The danger is greater for those with heavy liabilities to foreigners, even more so if denominated in dollars.

The US dollar has appreciated 14.5 percent year-to-date against a basket of major currencies, while the Indian rupee has depreciated by 7.4 percent against the US dollar.

There is some talk of coordinated currency intervention, as happened in the 1980s, first to weaken the dollar and then to stabilise it. The difference is that the former suited what the US then wanted. This made intervention credibly consistent with its domestic goals. Until the Fed is content with where inflation is going that cannot be the case this time. Currency intervention aimed at weakening the dollar by just one or even several countries is unlikely to achieve that much.

What is your reading of the RBI policy? Do you expect one more rate hike from the Monetary Policy Committee in the next meeting?

The RBI's monetary policy decision of hiking the repo rate for the fourth time in a row by 50bps to 5.9 percent was in-line with our expectations. We believe that the RBI will continue to maintain the balancing act between growth and inflation. The domestic growth drivers continue to be intact while inflation continues to remain sticky.

Also read: Shrinking foreign currency assets make a $8.13-billion hole in India's forex kitty

With regard to forward rate actions, the RBI will be data-dependent. Going forward, we believe inflation, Fed actions and the balance of payments will be critical in shaping the overall outlook.

What are the risk factors that the Reserve Bank of India is facing right now?

The global economic outlook is bleak, with recession looming and inflation running high. With global financial tightening the global economy is in the eye of a new storm. Global risk aversion remains high with the capital flight taking place.

Amid this challenging global environment, economic activity in India remains stable. CPI remains elevated owing to large supply shocks, spillovers from the global economy and improving demand. Inflation has risen above the tolerance level. Acute inflationary pressures have eased but are still elevated. Taming inflation and ensuring macro-economic stability remains the key priority, with the RBI citing strong domestic recovery.

Do you expect the equity markets to see June lows again in the fourth quarter of CY22?

It is difficult to predict markets and we have a long-term view on the same.

In the long term, it is clear that the growth prospects for India look significantly better than most developed economies. Following a disciplined bottom-up fundamental approach to identify opportunities with growth potential that are available at reasonable valuations is a process that has worked for us in every market cycle in the last 16 years—be it a rangebound market or a bearish or bullish market—and we will continue to stick to the same process. And even at the current levels, we feel that there are ample opportunities which offer favourable risk-reward.

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What are the stocks or sectors that you have bought in the current sharp correction? Also, what are the themes you are betting on?

From our perspective, telecom, pharma and media will see significantly strong earnings growth over the next two to three years if not longer. We have seen significant consolidation in the telecom sector. Top three players now control almost 90 percent of the revenue market share. There exists a huge opportunity because incrementally it is going to be difficult to shake the revenue share of the top two or three players and thus as average revenue per user (ARPUs) move up as new technologies like 5G are rolled out, the existing players will get stronger and stronger.

A similar trend of consolidation is being seen in the media sector as well. The top three players will control a significant portion of the market and as the economy moves from say $2,200 per capita to maybe $3,000 or $4,000 over the next five years, we think the media will do very well because a lot of incremental spends will be driven by media and entertainment and these companies are in a sweet spot.

As far as pharma is concerned, we see a strong moat in domestic pharma in terms of secular long-term growth opportunities. In the last five–seven years, the sector has seen a lot of misallocations of capital to growth opportunities in the US which kind of payoff as envisaged and we are now starting to see significantly better capital allocation at least from the top pharma companies in the last two to three years.

Most of the larger pharma companies are debt-free and we see them generating a significant amount of free cash flows going ahead.

We feel that pharma is where FMCG was 10 years back in terms of growth opportunity, at least from the domestic pharma business perspective and we see a reasonably long runway for growth there as well.

Is it the right time to bet on the banking and financial services space?

The larger banks are in a sweet spot where one can see credit growth and strength on the balance sheet. Our weight in BFSI is much lower as compared to the benchmark. We would be about 10 percent in financials as compared to the benchmark which would be 30 percent.

We, at Karma Capital, are finding opportunities in other sectors to be more exciting and hence our weight in financials is slightly lower vs benchmark.

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.
Sunil Shankar Matkar
first published: Oct 1, 2022 11:02 am