"I continue to believe we see volatility in the market and investors are better focussed on bottom-up opportunities rather than having a strong view on the market," Naveen Chandramohan, the Founder and Fund Manager of Itus Capital says in an interview with Moneycontrol.
In the IT sector, he believes that the risk-reward for IT continues to be to the downside as he expects the cutting costs and rationalizing IT spending by US companies to continue in coming quarters.
Naveen with more than 16 years of experience in the financial markets thinks capex cycle is one core theme. "One can also look at ancillaries (who supply to) core industries like cement, steel, mining all of which will benefit from the capex theme," he says.
Q: Which are the sectors looking attractive after the recent consolidation?
There are two reasons we find sectors attractive. One, where there are structural tailwinds for growth in the sector and they are available at a fair valuation – manufacturing-led capex names figure in this theme.
Second, the sector has been underinvested for a while and valuations start to look interesting again (good businesses are available cheap) – pharma, CRAMS, and CDMO businesses figure in here.
Q: Do you expect the market to consolidate or is there any possibility of another round of correction in the rest of the calendar year?
It's tough to have a short-term view of markets especially when they are not cheap. The one thing I am certain about is the US market is expensive – while short term it may go up, I believe the risk-reward is lower. In India, we are a lot more nuanced – macro is not an easy place today with oil prices escalating and capex-driven supply not coming in yet.
All of this makes it ripe for bottom-up stock picking rather than having a strong view of the market for the year. I continue to believe we see volatility and investors are better focussed on bottom-up opportunities rather than having a strong view of the market.
Q: What is the biggest threat to the equity markets in the current financial year?
The macro is not yet favourable for India. It was as long as oil prices were below $75 a barrel. If we see a sustained period of high oil prices, I believe this will put pressure on the country’s macro. I believe risks today can surface from there.
Q: Do you see a lot of uncertainty in the outlook for the IT sector?
The IT sector in India services companies across the US. These companies in the US have protected their margins over the last 3 quarters by cutting costs and rationalizing IT spending – both in the form of service-based and cloud-based spend. This does impact the IT sector at large and I expect this to continue for 2-3 quarters. I do believe that the risk-reward for IT continues to be to the downside. We have been positioned in Itus with no exposure in the traditional IT sector for a while now.
Q: Is it better to play real estate space via ancillary businesses?
We like businesses that have lower cyclicality as they have the ability to manage their balance sheet better during temporary periods of slowdown. Hence, as a firm, we have always preferred owning real estate ancillaries unless we can buy a good Tier 1 Developer below book (which happened during RERA in 2017).
Hence our philosophy around investing has been to invest in the ancillary business which will benefit from volume growth in the real-estate space as transactions close.
Q: Is the capital goods only sector to play the capex cycle theme?
Yes, it is one core theme. One can also look at ancillaries (who supply to) core industries like cement, steel, and mining all of which will benefit from the capex theme.
Q: Which sectors one can avoid for the rest of the calendar year?
I believe that’s the wrong way to think. You avoid a sector for its inherent aspects – cyclicality, no pricing power, increased competition, poor governance. Else, there is no reason to avoid sectors. You certainly do not avoid sectors for this year or next. You avoid it for its characteristics.
So for us at Itus, we do not invest in infrastructure that is predominantly funded by debt and where there is low barrier to entry. We would not invest in any sector where the working capital cycle tends to be > 9 months (say) and you have the government as your creditor. These sectors lend to poor returns for shareholders.
Q: What is your take on CPI inflation numbers?
I have always looked at inflation from a structural perspective rather than a month-on-month perspective. What I mean here is taking a view of monthly CPI dropping and having a view on what Central Banks are doing next is a futile exercise and a poor way to invest or make returns.
I continue to believe that we are in an environment of structurally high inflation and with the global balance sheets being inflated, the only way to come out of this is for the governments to inflate spending. This means I believe interest rates are going to be elevated.
What happens to monthly CPI numbers and whether the Fed is going to pause the next meeting or raise (the same with RBI) is a fool’s errand to invest.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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