Investors should be extra cautious with industrial stocks: Prashant Jain of 3P Investments

India is focused on increasing its share of renewable energy (RE), but we should not lose sight of the fact that EVs are not yet profitable, says Jain.

Prashant Jain, Founder, 3P Investments, believes that investors should be extra cautious  when it comes to industrial stocks as they are paying extremely high values for them. In an interview with Moneycontrol, he also said that Finance Minister Nirmala Sitharaman's announcement regarding free energy for households with solar rooftops will not trigger any meaningful investments in the space as it will become extremely crowded.

Edited excerpts from the interview:

Is private sector capex really ready for big-bang acceleration?

Time will tell, but the conditions are very conducive. Corporate leverage is at a 10-15 year low, bank NPAs (non-performing assets) are minimal, corporate profitability is broad-based. Also, with the government’s focus on make in India and PLI (production-linked incentives), India is emerging as a viable manufacturing destination for global companies. The commentary on order backlogs and order flows of engineering companies is growing at a fairly decent pace. So, private capex is already happening.

Also read: Private capex already picking up in India: Prashant Jain of 3P Investments

What is your outlook on industrials for this year?

Markets have priced in a strong capital formation for a number of years across sectors. In many places, these stocks are expensive. Industrial stocks have good growth potential, but if growth becomes overvalued, like in consumer staple companies, one should not extrapolate continued business growth into stock market returns. In the last three years, returns in industrial stocks have been more than the business growth. So, a lot of the future performance has been priced in.

Thus, investors should be extra cautious and tone down expectations in industrial stocks. If you are paying 40-60 times the earnings multiple, you have to be very sure of sustained high levels of growth. The risk-reward ratio in industrial stocks from here on is not good.

Also read: Industrial stocks pricing in high growth may disappoint; power utilities good investment options: Prashant Jain

What about green energy?

The world is very focussed on green energy, so this sector will grow. Electric vehicles (EVs) and artificial intelligence (AI) will consume a lot of energy over time. Hence, India's power demand growth should be quite healthy. India is focused on increasing its share of renewable energy (RE), but we should not lose sight of the fact that EVs are not yet profitable.

Solar rooftop companies are upbeat after the Finance Minister’s announcement. Is there something for investors in rooftop solar companies?

I don't think rooftop solar power will make much of a difference to  utility firms. Their  share of residential consumption is not huge. And utilities are a controlled return on capital business. On the supply chain side there could be some opportunities, but the scale at which the government is planning the rooftop solar thing, this field will be extremely crowded. I doubt if any meaningful investment opportunities will arise.

What about NBFCs?

There could be some more re-rating left for NBFCs (non-banking financial companies). So the opportunity for growth in this space is large. The return on capital is very attractive, and capital formation will grow faster than GDP.

What about PSUs banks? Is there some juice left?

The credit-deposit (CD) ratios of these banks are low, and in a deposit-constrained environment, they have a competitive advantage. Also, banks in India have underperformed, so the outlook on banks in general is good.

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