Kaizad Hozdar, Investment Advisor at TrustPlutus Wealth, observes that over the longer term, "the ancillary player’s businesses are less cyclical as opposed to the real estate players and they have exhibited decent growth in free cash flows." "Thus, the valuation premium of the large players in the home improvement space has traditionally been stiff and sticky too," he says in an interview with Moneycontrol.
He believes the same will continue and thus he prefers the ancillary players considering the fact that they also derive business from the replacement market.
With over 17 years of experience in equity research, equity advisory and portfolio management, Hozdar says equity investors would be better off focussing on pockets of domestic growth versus export-driven companies where the outlook is hazy given the multi-year low economic growth expected in the US and Eurozone region.
Q: Have you seen any surprising (positive) factors in the ongoing corporate earnings season?
The expectations from corporate India, as regards Q4 FY23 earnings, have been sedated given the slackening demand environment. The only silver lining that could materialize is the hope for some margin expansion given the steep fall in raw material prices, fuel, and transportation. Till date, most sector results have been in line with expectations.
The only notable outperformance has been seen in the hospitality sector with hotels and leisure segments setting up a good show. The other sector which had high expectations of strong profit growth is the tyre sector. Most companies here have exceeded the profit estimates due to a sharp fall in input prices, thus aiding gross margin expansion.
The staples space too has started seeing some sanity on the margin front due to a decline in palm oil, packaging and transportation costs with some companies now starting to exceed profit estimates. All the major auto 2-wheeler players have certainly exceeded expectations on bottom-line growth given the decline in metal prices.
Q: Do you think 2023 is expected to be a base for strong bull run in following years?
India’s nominal GDP has grown at around 12 percent over the past two decades. Earnings growth too has been ~12 percent over the past 2 decades. CY'21 saw a smart recovery given the pent-up demand in the economy post the pandemic restrictions being lifted. This led to a strong rally in the markets which appreciated by ~50 percent from the pre-Covid highs and thus valuations were above historical averages.
Past experiences tell us that this excess flab melts away over the subsequent 6-8 quarters due to the markets correcting and valuations normalising. We have been in this corrective/consolidation phase since last year and a half now. It is a matter of time before we start seeing demand bottom out and we are also likely to see margin expansion in FY'24 given the slump in commodity prices and inflation past its peak.
Thus, it would be reasonable to assume that post a rough CY'22, the current calendar year could be seen as the year of a strong foundation being laid for the subsequent recovery which is likely given that we expect the nominal GDP to continue to steadily grow 11-12 percent over the longer term.
Q: Which are your preferred investment themes for current financial year?
Some of the cyclical industries like tyres, cement, auto, and hospitality have already seen margin improvements in the quarter gone by and given the continuing slide in input costs like metals, crude, pet coke and freight the Q4 numbers continue to get stronger.
Thus, the bottom line growth could certainly shine brighter than the topline growth. Equity investors would be better off focussing on pockets of domestic growth versus export-driven companies where the outlook is hazy given the multi-year low economic growth expected in the US and Eurozone region. The winning sector will eventually be the one where the margin expansion gets coupled with demand recovery leading to runaway bottom-line growth.
Q: PSU space has been buzzing a lot and Nifty PSE index already at record high levels. Is the space looking overvalued now?
Post the consolidation over the past 4-5 month the Nifty PSE index has staged a smart-up move in the month gone by and the same continues in the current month too. The PSEs are majorly focused on the infrastructure, power and energy segments. The recent budget has emphasised infrastructure improvement with a massive Rs 10 lakh crore outlay. Many public sector enterprises are likely to benefit from this capex-driven focus.
In addition, there are a few PSEs catering to the railways. This segment too has seen solid capital allocations in the recent budget. Defence indigenisation too has been given a fillip where too few large payers are in the PSE space. Thus, most of the PSE stocks have moved higher on good visibility of growth over the next 1-2 years.
The jury is out on whether the PSE pack has run ahead of fundamentals given the fact that the earnings growth in capex-heavy businesses follows with a lag. So, although the valuations of these stocks may be higher than their historical averages, we need to be cognisant that they may continue to deliver superior returns given the focus of the government and the strong growth in budgetary allocations towards capital spending vs. revenue spending.
Q: Is it better to bet on realty space or real estate ancillary sector now?
The large listed real estate companies have shown consistent growth in volumes post Covid. In fact, the trend in the industry seems to be that the larger organised players seem to be gaining ground versus the unorganised players who have still not fully recovered from the pandemic bottlenecks. That said, most large real estate players have debt and will continue to have the same if they intend to grow at the pace they have over the past 2 years. This certainly will put the brakes on strong stock price appreciation given that many of these players do not throw up large free cash flows.
On the other hand, most of the top listed players in the real estate ancillary space in segments like plumbing, paints, pipes, tiles, sanitary ware, cables, switch gears, etc. have strong cash flows and can expand capacity with the existing operational cash flows.
Over the longer term, it has been observed that the ancillary player’s businesses are less cyclical as opposed to the real estate players and they have exhibited decent growth in free cash flows. Thus, the valuation premium of the large players in the home improvement space has traditionally been stiff and sticky too. We believe the same will continue and thus prefer the ancillary players considering the fact that they also derive business from the replacement market.
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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