Although Amar Ambani finds Indian marques like Maruti Suzuki, Tata Motors and TVS Motor Company as best bets among original equipment manufacturers (OEMs) in the auto space, he is keen on foreign labels in the auto ancillary space because, he believes, they understand the future technology better than us.
The group president and head of institutional equities at Yes Securities has the building materials counter among his top themes. "The government’s continued thrust on infrastructure, coupled with strong housing demand, will continue to spell big business for players in segments like plastic pipes, paints, home improvement, cables and wires and the likes," he says in an interview to Moneycontrol.
He is overweight on Indian equities from a medium to long-term perspective. "Even if inflation stays elevated, it is prudent to stay invested in an asset class rather than holding cash and risking an inflation-impacted purchasing power," says Ambani, backed by his nearly two decades of capital market experience. Excerpts from the interview:
Do you see a strong upcycle in the auto space for the next couple of years?
We’ve already seen a healthy upcycle in both passenger vehicles (PVs) and commercial vehicles (CVs) for the last 2-3 years. In the case of PVs, FY23 recorded the highest-ever volumes. Going forward, a cyclical moderation would likely pervade FY24, marked by mid-single digit growth, and FY25 should see a cyclical decline.
In the CV space, FY24 should witness a high single-digit growth while in FY25, only a well implemented scrappage policy can help sustain growth, else a downturn seems inevitable.
Two-wheeler is the only segment where volumes haven’t made a comeback to pre-Covid level. The industry has long been waiting for a broad-based revival, and the hope is that rural demand will pick up at some point.
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Our pecking order for sub-segments is PVs, followed by CVs and two-wheelers. Tractors are last on our list, as only the upcoming elections can prevent a contraction. Relative to the sector, Maruti Suzuki, Tata Motors and TVS Motor Company are the best bets among OEMs (original equipment manufacturers).
In the auto ancillary space, we prefer global names over India names as they comprehend future technologies well. Samvardhana Motherson International is a solid structural bet on international business, Endurance Technologies sits pretty on a broad two-wheeler recovery and premiumisation trend, while Bharat Forge is a credible play on macro recovery and defence.
Do you see any threat for banks in the rest of this fiscal?
I see nothing particularly worrisome for Indian banking given that (1) banks are adequately provisioned, (2) They are well-capitalised, having come out of a decadal bad assets cycle that was stress-tested after Covid, (3) they have deleveraged corporate balance sheets to rule out the threat of skeletons, and (4) there isn’t any property bubble today as inflation-adjusted prices have still not moved up, and demand stays strong.
On the business side, we could see some growth moderation on account of macro factors. Margins have peaked out and cost of deposits are catching up. On the valuation front, any negative developments in the US banking system like rating agency downgrades could induce some pressure on stock prices.
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After reading the June quarter earnings season, do you see substantial improvement in upgrade-to-downgrade ratio for the rest of this fiscal?
The upgrade-to-downgrade for NSE 200 is slightly skewed towards downgrades with 98 stocks witnessing a cut in EPS assumption for FY24 (unchanged or estimates not available for 11 stocks). Sectors dominating upgrades included Pharma, Oil Marketing and Financials.
Overall, June results were in line with our expectations. Although the Nifty EPS for FY24 has seen minor moderation from the onset of the Q1 earning season, we don’t expect material moderation from here as pre-election spending could inject some revival in the second half of the financial year.
Do you see significant rural economic recovery in the second half?
This is a tough call. Incomes have been impacted, savings depleted, and debt levels have risen. Rural FMCG consumption hasn’t seen a meaningful pick-up and two-wheeler sales have seasonally slowed down in June and July.
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Having said that, government schemes are doing well, and going by MSP trajectory and wage growth, things may look up, especially if we have a bounty Kharif harvest. While we’ve had mixed commentary from FMCG companies on the rural front, many outside this space are hopeful of a buoyant festive season.
White goods players, for instance, are upbeat about the prospects of entry-level products, which implies a revival in rural demand.
Your top theme for FY24...
One of our top themes is the building materials. The government’s continued infrastructure thrust, coupled with strong housing demand will continue to spell big business for players of segments like plastic pipes, paints, home improvement, cables and wires and the like.
Cables and wires players have posted great numbers in the recent result season. Plastic pipe companies have a bright future riding on irrigation, plumbing, housing and infrastructure. Home improvement players in tiles, plywood, sanitaryware will see both new orders as well as replacement demand.
Is it a good time to build positions in select consumer discretionary stocks?
The top tier of the urban population have seen their savings swell post Covid, and therefore their propensity to spend has gone up. Even in certain other pockets of the population, we see a strong intent to spend and avail credit as well. Even though a broad-based recovery eludes us, selective pockets will surely do well.
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We see huge demand for plane travel, rail travel and hotels. Luggage space should do well on the back of heightened travel. There's healthy demand for house renovation as well as for the first-time spends after buying a new home. Greenply Industries is one of our top picks in this space.
Plastic pipes is another product linked to home demand and we like Prince Pipes here. In air conditioning, weather changes will dictate seasonal demand patterns but should do well over a 2-3-year period.
Here, we like Amber Enterprises, which is a play on the entire cooling space and increased product offerings through AC component supplies for India and overseas. We also like Whirlpool following the change in their management setup, several product launches, and expansion in distribution network.
Do you expect the market to remain in a consolidation period for a couple of months or till the beginning of September quarter earnings season?
Given the uptick of recent months, a consolidation can't be ruled out. Global factors like a possible downgrade for US banking could sentimentally impact Indian equities. US stocks are correcting presently as the equity risk premium is not high enough, and bond yields have inched upwards.
While the Fed may raise the rates once or twice, the debate has now shifted to 'how long will the world have to live with elevated interest rates'. Further, there has been some recent up move in certain commodities like Oil. Back home, consumption, especially the state of rural markets, is a cause for concern. INR has weakened vis-à-vis USD and that could see FIIs going on pause mode.
However, from a medium to long-term perspective, we are overweight on Indian equities. Even if inflation stays elevated, it is prudent to stay invested in an asset class rather than holding cash and risking an inflation-impacted purchasing power. With global investors looking for an alternative to China, FIIs will commit big to India as soon as bond yields and INR stabilise.
Domestic liquidity is strong, which explains the big moves within mid and small caps. The margin of safety for Indian equities in the long term looks high in my view. To reiterate, the foundation looks rooted and robust given that banks are well capitalised, corporate India balance sheets are optimally de-leveraged, and there's no housing bubble to deter us.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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