Daily Voice: Risk reward not favourable for banks but significantly overweight in domestic cyclicals, says Alok Agarwal of Alchemy

How do you position your portfolio now? Which are the themes to bet on?

The recent Indian election results have caused significant market volatility, largely driven by sentiment rather than underlying economic realities, in our view. Considering the current market dynamics and strong economic fundamentals, we recommend a strategic approach that balances caution with a focus on long-term growth. Our portfolio remains significantly overweight in domestic cyclicals, including power, industrials, defence, railways, real estate, and autos. We uphold our views and positions, emphasizing a process that prioritizes growth visibility over short-term market narratives.

Are you super constructive on the banking sector?

No. Banks have seen the best of times in terms of good credit growth, rising margins, and falling credit costs. Going forward, we do not expect all three to remain strong – at least one of the three is likely to put pressure. With over-ownership and not-so-cheap valuations, the risk-reward is not favourable, in our view.

Moreover, the previous cycle was dominated by the consumption theme and hence retail lenders did pretty well. The current cycle seems to be more of a capex cycle. Here, lenders to those aligned with the capex cycle may do better.

Do you think the insurance stocks are available at reasonable valuations?

The life insurance industry grew somewhat in FY24, but in FY25, growth is predicted to resume in the mid-teens. Focus on the agency channel is anticipated to rise as a result of certain banks experiencing difficulties with deposit growth. Valuations for the industry in terms of P/EV have come down in the last few years to reasonable levels.

General Insurance industry’s earnings are expected to grow in mid-teens over the next couple of years. The sector valuations have come off in the last couple of years to below historical averages.

Is it the right time to have exposure to consumer discretionary space?

With per-capita income around $2,500 and expected to double in 7-8 years, the consumer discretionary space is expected to see structural growth in coming years. Near term triggers may keep changing. The K-shaped recovery seen post-COVID was clearly visible in this space too. We would like to believe that even the real estate sector has shades of being consumer discretionary. Auto, consumer durables, and retail are other major parts of the sector. We are positive about the sector.

Is the auto space looking overbought or do you still see more upside in the space?

Among the major elements presently influencing the dynamics of the auto industry are:
1) Concentrate on achieving emission targets with the necessary government policy support.
2) A notable trend in all segments toward premiumisation.

Long-term ‘winners’ will probably be the OEMs who can adjust to these changes the best. After two years of strong demand, the auto industry is probably going to take a break in terms of growth in FY25. Over the next two years, the sector is expected to grow at 6-9 percent CAGR. On the other hand, the auto component industry will likely see many opportunities for growth in the future, especially since India is now one of the countries that benefits from the global OEMs' supply chain de-risking strategy. In light of this and the comparatively attractive valuations, we currently favour Auto Ancillaries over OEMs.

Do you expect better earnings growth in Q1FY25 than Q4FY24?

Corporate earnings for the fourth quarter of FY24 concluded strongly, with broad outperformance across all aggregates. The beat was driven by domestic cyclicals like autos, cement, capital goods, healthcare, and banking. On the other hand, global cyclicals like oil & gas and metals decreased overall profitability.

Nifty 500 Index aggregate net profits jumped ~15 percent YoY in the Q4FY24, with Nifty 50 Index aggregate profits growth being 12 percent YoY, both being ahead of estimates. There have been minor upgrades in the overall earnings, with the next 2 years likely to see over 15 percent CAGR in earnings growth.

With the earnings growth trajectory continuing to be ahead of GDP growth, this bodes well for the markets.

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