Avendus Olivo PMS executive director and portfolio manager Tridib Pathak finds more opportunities in consumer discretionary space as against consumer staples.
"As we cross higher per capita income levels, which is already happening, many erstwhile discretionary consumption sectors are increasing becoming non-discretionary," Pathak, who has more that more than 28 years of experience in the fund management, has said.
In an interview to Moneycontrol, the veteran investor said private banks offer a good investment opportunity strong credit growth and stabilising net interest margins. Edited excerpts:
When do you expect the RBI to begin lowering interest rates?
All indicators are in favour of an easing in monetary policy going forward. The CPI inflation was down to 5.1 percent in January 2024, within RBI’s comfort band of 2-6 percent. Core CPI inflation is down to 3.5 percent, a four-year low. RBI projects FY25 CPI inflation at 4.5 percent.
Globally, inflation is well under control, with China reporting deflation. This is further supported by that fact the government has opted for a faster fiscal consolidation. Real interest rates are also at very high levels of 2.5 percent+. So, we think interest rates cut is a matter of time and will be in sync with global cuts.
Also read: RBI bars JM Financial from financing against shares and debentures; major deficiencies cited
Which are the sectors that could be dark horses of FY25?
We are purely bottom-up stock selectors. We have an investment process which helps us identify opportunities from our around 140 stocks coverage universe at any point of time. Having said that, our bottom stock selection does lead to sector/theme/trends positions. We believe stocks from some of the sectors discussed below could do well.
>> Life insurance space: Low penetration, increased push towards the high-margin protection business in the long term and undemanding valuations. Share prices of life insurance companies imply a growth rate of 3-5 percent per annum in the APE (annual premium equivalent) for the next few years, whereas we think actual growth rates could be 10-12 percent per annum at least.
>> Manufacturing presents a compelling opportunity due to government support through PLI (production-linked incentive) schemes, much improved infrastructure, better competitive advantage and China + 1 opportunities. Currently, we have around 40 percent exposure in our portfolio to competent businesses from EMS, pharma, auto ancillaries, textiles and capital goods space.
>> Housing, which is real estate and housing finance. Demand is strong, interest rates may have peaked and affordability is still good.
>> We find more opportunities in "consumer discretionary" sectors as against "consumer staples". As we cross higher per capita income levels, which is already happening, many erstwhile discretionary consumption sectors are increasing becoming non-discretionary. We are seeing a lot of premiumisation as well. Within these sectors we find stock opportunities in quick service restaurants (QSRs), telecom, and home improvement.
>> We find stock opportunities in private banks. Three things will work in their favour: (a) strong credit growth as the economic growth remains robust (b) net interest margins will remain broadly stable – in a range, (c) asset quality issues are behind now and we see credit costs (provision for NPAs) falling fast having peaked out. So, we see a good level of visibility in earnings growth for these banks. More importantly, we see a better valuation arbitrage in favour of private banks when compared with NBFCs and PSU banks. Most private banks are trading below their average valuations, while growth is not a concern.
Also read: Paytm can overcome setbacks to lead in Asia, says Vijay Shekhar Sharma
Do you think FY25 will be yet another strong year for equity markets?
We continue to be quite positive on the Indian market outlook. India’s narrative is changing, and it is changing fast and for the better. Growth is the reason and, along with it, India’s much improved macro-economic stability. India’s growth gap with the rest of the world is widening and India will the fastest-growing major economy in the world over the next five years at least. So, visibility of growth is the key reason.
If growth is visible and sustainable, market returns will follow. Over the last 20 years, a substantial part (around 85 percent) of market returns have been contributed by earnings growth and dividends. So, we think growth and the underlying increase in the intrinsic value of business enterprises will lead the markets.
We believe it is avoidable to await/time a correction when one is investing from a long-term point of view. Corrections are a normal and necessary part of market behaviour.
Sectors that will drive earnings growth in FY25? What are your broad earnings expectations for FY25?
Our aggregate portfolio is expected to post an earnings growth of around 24 percent for FY25. We expect stocks from the following sectors to report decent 15 percent+ growth in our portfolios: Life insurance, private banks, housing finance, telecom, QSR (quick service restaurant) and manufacturing.
Will the economy grow more than 7 percent (the RBI forecast) in FY25?
We think so. Fiscal consolidation should allow private sector investments to crowd in. Interest rates should certainly be lower as we proceed in FY25. High frequency economic indicators are showing sustained strength as seen from the 8.4 percent real GDP growth in Q3FY24.
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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