Daily Voice | This fund manager is bullish on SRF, SKF, PI Industries. Find out why

Which sectors are you bullish on?

PSU banks, capital goods, utilities and power stocks — these are the core economy-related stocks that are likely to do much better going ahead.

Which B2B segments are you looking at?

We are bullish on companies dealing with fluorine chemistry. Fluorine is used in air conditioning, electric vehicle batteries, and it is highly reactive and difficult to handle. There are very few companies in this space, like Navin Fluorine, SRF and Gujarat Fluorochemicals.

The government has banned imports of air conditioners with refrigerants, so the assembly is now happening in India. That’s why the market share of refrigerant gas providers is zooming. Moreover, ACs have only 6 percent penetration at the moment. It is the biggest consumer discretionary theme in India right now. SRF is a key beneficiary of all this.

Another segment is bearings. The budget outlay for railways is Rs 2.4 lakh crore for FY24, up 50 percent on year. Be it Vande Bharat trains or the dedicated freight corridor or the new National Logistics Policy, a key component associated with this capex will be bearings. SKF India has the government’s approval to manufacture Class C and Class K bearings that will be used in railways. So SKF’s earnings will grow multi-fold now.

But, there are other companies in the bearings segment too…

Yes, there’s Timken and Schaeffler but they are already expensive. From a valuation perspective, SKF looked better to us.

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Many market participants believe pharma stocks will outperform this year, given the sharp correction last year. What is your view?

For pharma companies, it is all about the new launches in the US market. Amid generics pricing erosion, all companies have not been able to plan new launches. Cipla’s new respiratory launches have been delayed due to Form 483 observations to the Pithampur plant and look at the stock, it is down 12 percent this year.

I think money from pharma will move into chemical stocks. Chemical stocks were the first to reach new highs when markets touched a high in October 2021. Since then, the stocks have underperformed. So investors could look at these stocks now.

Apart from fluorine chemistry, which other niche interests you in this space?

That would be custom synthesis. Basically, companies engaged in research, development, manufacturing and testing of molecules, with pharma or agro-chemical firms as clients. This industry got a boost after COVID-19 as the world got a sense that India is capable of coming out with a quality product within a limited timeframe.

PI Industries is one such example. PI Industries largely caters to the agro-chemical industry but its recent acquisition of TRM India as well as Solis Pharmachem marks foray into pharma. This is a big trigger for the stock.

Green energy – a sunrise sector – is getting a major push from the government. Are you looking at this space?

NTPC is the best stock to play this theme. We actually like the entire power sector. Power demand in the country is set to double in coming years with rising industrialisation. Last year, 203 GW was the peak power demand and this year, it could be as high as 231 GW. Be it renewable energy or the old, conventional companies, all stand to benefit.

Power producers were doing social service till the recent past as discoms failed to pay dues. In 2022, the government has come out with an easy instalment scheme which makes payments easier. Since the announcement of the scheme, 35 percent of the money has actually come back!

Today, NTPC has an installed capacity of over 70 GW and it targets to grow this to 130 GW by 2032. Eventually, the renewable arm of the company will be listed and the parent company stands to benefit from the stake sale. NTPC’s earnings per share has grown from Rs 12 to Rs 17 in the last few years, so it fits our ‘value to growth’ story perfectly.

Finally, foreign institutional investors have pumped in over $1.5 billion into equities in May so far. Do you see this momentum continuing?

Our repo rate has increased from 4 percent to 6.5 percent in the last one year but our 10-year bond yield has remained in the 7.2-7.5 percent. This is because the Indian government is not borrowing too much. In fact, the borrowing target was cut down by Rs 10,000 crore for FY23. Despite an increase in capex plans, borrowing has remained stable and that is remarkable. Coupled with robust tax collections, this is making the government’s balance sheet better.

Another key factor to look at is the dollar index movement. Three banks collapsed in the US but the dollar index stayed put near the 103 level. This is a big positive for emerging markets. When the dollar remains subdued, foreign investors come rushing in and that is exactly what is happening. Moreover, Indian markets are now relatively better valued. In October, we had a premium of 105 percent over emerging markets, now it is down to 62 percent. So FII inflows will continue to sustain for some time now.

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