Daily Voice: This CIO remains bullish on luxury consumption, import substitution themes, but avoids 2-wheeler space

Sheetal Malpani is the Chief Investment Officer and Head of Equity at Tamohara

Currently premiumisation/ luxury consumption and import substitution are two pockets we have been and remain bullish on, said Sheetal Malpani is the Chief Investment Officer and Head of Equity at Tamohara in an interview with Moneycontrol.

Further, he has been incrementally buying financials (private banks largely), select chemicals and pharma names.

However, "we will avoid auto OEM (original equipment manufacturing) space especially 2-wheeler, and will prune our IT exposure on upsides," said Malpani who has more than 14 years of experience in the capital markets.

Which sectors should focus on for multibagger opportunities in the small-cap space?

In small caps one has to be more stock specific (bottoms up) rather than take a sectoral call. Within the same sector, it is all about execution capabilities and managing with limited resources especially when companies are smaller in size.

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Sheetal Malpani

Chief Investment Officer and Head of Equity|Tamohara

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We have seen within a sector, some companies that have become 10x or more and some companies have eroded wealth in the same time frame. We like to buy companies where the runway for growth can be upwards of mid-high teens while operating with return ratios of nearly 18-20 percent.

Currently premiumisation/ luxury consumption and import substitution are two pockets we have been and remain bullish on.

Do you believe the corporate earnings season in the second half of FY25 will be better than in the first half?

It should be the case as markets have accepted the excuse of elections, heat wave and monsoon in the first 2 quarters of FY25. However, the consensus is at 12 percent earnings growth for FY25, and I believe we should end up with 8-9 percent growth given how earnings have been till date. Earnings downgrades are largely due to GRM (gross refining margin) in the oil and gas space coming off and in some commodity driven sectors, so the markets won't be too perturbed by the attribution for the earnings downgrade.

Is it better to invest in the power sector through ancillary companies?

We believe ancillaries are a better play to make risk adjusted returns. This has been the case in most high capex regulated sectors where ancillary companies have done better than underlying companies.

Power has a large value chain whether it be in equipment suppliers for power generation or transmission and distribution. With the advent of renewables, many more ancillary plays are there in the O&M (operations and management) space. Most importantly it is important to note that the Return on Equity a power generating company makes is regulated by the government however ancillary companies do not face any such restrictions.

What is your take on the capital goods and infrastructure segments?

After a gap of 10 years, I have seen capital goods perform. In the last 2 years capital goods companies have seen sharp revenue growth and margins uptick. The Capex cycle is yet to start for the private sector, so the earnings cycle for these companies has another 3-4 years of growth ahead. In many cases however, this seems to be priced into the companies’ stock price. Any time or price correction can be used to build positions in this space.

Are you very bullish on the pharma and healthcare sectors?

I do not think one can take broad sectoral calls in the pharma/ healthcare space. This sector has idiosyncratic tailwinds and risks. Currently, we are highly overweight on the sector but each of the companies have unique opportunities in terms of a specific product in pipeline, etc. or some specific tailwinds that cannot be applied broadstroke to the entire sector.

For example, not all companies wearing the tag of CDMO (contract development and manufacturing organization) can and will benefit from the US BIOSECURE Act. Only a select few operate at the scale and with a clientele that will garner benefits from this macro tailwind.

Which sectors do you want to focus on in the second half of FY25?

We have been incrementally buying financials (private banks largely), select chemicals and pharma names. Some of the beaten down consumer names especially in the building products space look interesting given the price and time correction we have seen there.

We will avoid Auto OEM space especially 2-wheeler, and will prune our IT exposure on upsides as we believe recovery in price is there ahead of earnings recovery and at best these companies will mirror index returns.

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