Daily Voice | Sanjay Bembalkar of Union AMC identifies 3 segments in India with fantastic growth runway

India needed a strong infrastructure backbone for the economic aspiration it nurtures and to fuel long-term growth for its demographic dividend. Now, at this juncture, as current manufacturing capacity utilisation is reaching elevated levels, we see India's growth story at the cusp of a new capex cycle. This is backed by internal consumption, and exports demand as we integrate into global supply chains. The point to be noted is these developments take multiple years to develop and require resolute positive support from allocators of capital, be it private or public entities.

A deeper look into capex numbers indicates A) improved spending on areas like infrastructure development, renewable power, power transmission network, defence and dwellings and B) broad-level private capex is yet to gather momentum.

While capex intensity has increased in the recent past, we see two-fold reasons for it to continue:

One is the need for higher capex: India is integrating into global supply chain and is coming on the radar of global manufacturers which will require continued development of infrastructure to bring it to global standards capable of handling large volumes of goods and services in optimum time

The second is the willingness to do capex: Current Government's thought process seems to be focused on achieving long term targets and it has not come under short term pressures. Both these areas provide us with enough confidence about the continuity of capex, as private capex restarts might be the cherry on top.

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Q: Is it the time to start betting strongly on export themes?

We have been discussing for a couple of years about Production Linked Initiatives and their likely impact on various sectors. The government has explicitly incentivised the companies to produce value-added products and tap into either large domestically available demand pools or global consumers. E.g. strong export numbers from mobile device manufacturers are indicative of the Indian Industry successfully tapping global consumers' demand.

While this underlying current of export themes is quite strong, on an intermittent basis, these export destinations developed economies are facing an economic slowdown. At this juncture, a combination of restrictive monetary policies, geopolitical situations and inflationary pressures are resulting in an economic slowdown, which has the potential to push export demand for some time in future. This change in dynamics warrants a selective approach. We will be cautious while deploying our allocations on export-oriented themes in the near term, though we are confident that this story will unfold over the next 2-3 years.

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Q: Do you think the next leg of rally in equity markets will be driven by September quarter earnings or any other global factor? Till then, do you see the consolidation to continue?

We have seen a good closure to Q1FY24. Forward earnings estimates for broad markets have seen upward revision, indicating a positive momentum. The overall tone of the results was positive, backed by domestic demand, raw material price corrections and increased visibility of expansion projects.

Management of companies are confident of the growth targets they have set for companies, and the business scenario outlook is positive. We experienced pockets like urban consumption technology, which are facing challenges. Most of the other sectors, like Industrial, Manufacturing, Financials, and Power Infrastructure were quite buoyant, which was visible from data like order book growth, credit disbursement growth, etc.

At Union Mutual Fund, we follow the quantamental approach which inter alia includes looking at companies and markets from the lens of the Fair Value approach which encompasses the long-term potential of businesses to understand their direction.

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Our analysis indicates that markets are in the ‘Fair Zone’ of valuations, which means there is a balanced risk-reward for investors. At such levels, investors need to be focused on their strategic asset allocation and continue participation in the equity markets. While near-term headwinds from macro variables like higher interest rates, restrictive monetary policies, geopolitical situation and its second-level impact continue, our confidence remains steadfast in India’s potential. It is now fairly well documented that India is a bright spot on a global level; now, our corporates, electorates and public machinery have to stand up to the confidence bestowed on them by investors.

Q: Themes we are positive on?

We believe India’s best is yet to come. Like Chandrayaan-3, which has shown the world India’s technological prowess and cost-efficient model, our corporates are also going through a similar critical journey to make a mark on a global scale. Our entrepreneurs have exuded aspirations to achieve scale, confidence to target large global markets and diligence to deal with growth along with profitability.

We believe India’s manufacturing sector, financial sector and discretionary consumption sector have a fantastic long runway of growth, and many companies from these sectors have shown I) competence on a global scale, II) wisdom to allocate capital in a prudent way, III) strong corporate governance standards, IV) ability to handle industrious scale. We are also positive about the Communication services industry, which has experienced a turnaround after a series of issues.

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Another theme whose time has come is innovations. As per capita income has reached a sizable number of $2000+ (Data pertaining to the year 2021)[i] and is growing at a fast clip, companies that are innovating at a fast rate are likely to see strong growth in their business opportunities. We are in the midst of the NFO of our Union Innovation & Opportunities Fund: we believe the time of innovation theme has arrived and this theme is likely to stay for a long period.

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