Daily Voice: RBI unlikely to hint at interest rate cut in October policy meeting, says First Water Capital's Arun Chulani

The auto sector is definitely a sector that we believe in. But the stock market is often a tale of two cities. There are over 100 listed companies in autos and auto ancillaries lying across the value chain and despite some of the excitement amongst certain stocks, we believe that pockets of value still exist. And that is where we are concentrating our research and in fact building up our positions. We are not fazed by calls of over-valuations, because we only need a handful of stocks to generate alpha.

Are you focussing on the chemical sector now?

We are strong proponents of chemicals, and this happens to be one of our largest sectors. The sluggish demand from China, high inventories, and, in some cases, increased capacity have caused a downcycle for some chemical companies. We have been closely monitoring prices, margins and demand to see when the green shoots of recovery will be coming through and we are hopeful that we are closer to the beginning of better times.

China is always important to have an eye on as it typically produces 40-50 percent of most basic commodities. The recent stimulus boosts in China may act as a trigger to increase demand, but that remains to be seen. There is still an overarching thesis that Indian companies will benefit from a voluntary reduction in supply given China’s higher wage structure and Blue Skies policies. Of course, nothing happens in a straight line given that there are multiple factors involved from employment to government interests, but with the added aspect of global supply chain diversification, we are hopeful for this sector over the long term.

Which are the sectors to be added in portfolio now, and why?

Recently we rebuilt our position in flexible packaging, which has performed well for us. This is a case of double-dipping within the same pool to create alpha. During 2022, we reduced this sector from a heavyweight to a lightweight as the sector had the margins and demand of a lifetime. At the time, it benefited from rising margins due to higher oil prices, a surge in demand for packaged goods driven by the pandemic, increased demand for PPE and there was talk of some companies being acquired. However, this was the peak at the time, as the good times attracted new capacity and in turn over-capacity causing margins to decline. This impacted stock prices, where no one and his dog were willing to look at the sector. However, we continued tracking, until good value combined with green shoots caused us to increase our position again earlier this year, which is playing out well for us.

We are also looking at private banks, which seem to have been left behind in this rally. They are growing relatively well, have decent valuations, and have had multiple clean-ups in the last 5 years both with COVID as well as during India’s “Lehman’s moment” at the end of 2018, when ILFS collapsed. Plus, it seems that the private CapEx cycle has yet to really occur.

And of course, we like chemicals for the reasons mentioned above.

FIIs are positive on India's growth story but worried about valuations. Your take?

It doesn’t seem that FII inflows have really increased since around 2007, when the average market cap was about $1.5 trillion, whereas now it stands at around $5.7 trillion. Today, we are one of the largest market caps, even bigger than the FTSE, Germany, France and Hong Kong. We are a different beast. I believe that they will have to increase their allocation rather than group us as ‘Emerging Markets Asia ex-China.’ Given our size, I believe a separate allocation will be dedicated to India.

Plus, which other major economy in the world has the same long-term tailwinds, from young demographics, still benefiting from infrastructure spending, digitization and supply-chain diversification?

It is an asset allocator's job to be ahead of the curve, and not be bi-polar. There are pockets of good valuation out there. FIIs should either take the time to find them or team up with someone who can.

Do you expect the earnings growth to remain at around 15 percent in the coming five years?

This is too broad; we prefer to look at things on a more granular basis sector to sector and company-wise.

Will the RBI hint about interest rate cut in October policy meeting post Fed move?

Although I am not an economist, I don’t believe they will hint at a rate cut. The Indian central bank seems to run a tighter ship. It is an election year in the US, plus the Fed has to factor in US economic specifics. While a rate cut would give the RBI flexibility, I believe that they will look to see if inflation is sustainably under control. The economy is still growing at 7-8 percent, so there does not seem to be any immediate requirement to stimulate an increase in demand.

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