With the BJP getting lesser seats this time compared to the previous general elections, key reforms in defence and railways may slow down slightly, says Hitesh Zaveri, Head of PMS & AIF at Axis Mutual Fund. Zaveri is of the view that while valuations in defence companies are rich, the substantial and increasing order books justify these valuations.
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Where are markets headed from the current levels?
We have a government that is relatively new, and the opposition has grown stronger. This could impact the pace of reforms. Previously, bold actions were taken with ease, but now there is some concern that bold reforms may not happen.
Companies and businesses are bullish and are executing growth plans confidently. Capital availability is high. Multinational corporations have provided high valuations, reducing their stake in the listed market, which is being absorbed smoothly. Mutual fund flows are unprecedented. Valuations in many pockets are not as low as they were before, pushing fund managers to find newer ideas. Foreign money, which has been going out, is expected to come back given the strong economic growth.
Which are the sectors which could see reforms slowing down?
I'm not suggesting no bold reforms will happen, but earlier, bold reforms were undertaken more easily due to a strong majority. Now, with a thinner majority, reforms might slow a bit.
Going ahead, how do you see the markets behaving in response to the election verdict?
Businesses are bullish, and domestic mutual funds are fantastic, creating positive momentum. Valuations in certain pockets may require fund managers to work harder to find good ideas. Many private equity portfolios are waiting to get IPOs, which will reduce pressure on existing listed stocks and bring more companies to the market.
Which sectors are attractive in terms of valuations and growth?
Banking, both private and public sector, and NBFCs (Non-Banking Financial Companies) are attractive. Automotive OEMs, auto ancillary, FMCG (if the monsoon is good), pharma, retail, e-commerce, asset management, and specialty chemicals are also promising. NBFCs, in particular, reach areas where organized banking struggles, will offer various financing solutions effectively.
Why NBFCs?
NBFCs have a growth appetite and can reach customers more effectively than traditional banks. They utilize technology and craft business models for various categories, such as MFI financing, low-value property loans, MSME funding, vehicle financing, and property financing. Growth needs cash, and NBFCs are well-positioned to provide it. More small entrepreneurs need cash and NBFCs will help them.
How do you see the housing finance sector?
Housing demand is driven by the natural progression of families breaking into smaller units over time and therefore there is a healthy demand for residential unit. Warren Buffett’s letters explain this phenomenon well. In India, aspirations for better housing have risen, and there is a consistent demand for residential units. Anything related to housing is doing great.
Can you elaborate on housing-related comment?
All related sectors are promising—real estate, housing finance, fast-moving electrical goods, and household goods, paint. The choice depends on the quality of the company, management, valuation, and growth potential.
Have the views changed around sectors like defence, power, or railways post the poll results? Are the current valuations still justified?
The order book for defence companies remains high and growing. Ministers have talked about 100-day plans, indicating continuing potential. In terms of valuations, they’re rich. I’m not saying they have peaked out but they are at healthy levels. But they are justifiable for the growth rate ahead.
Have you tweaked your portfolio after the election verdict?
Not significantly.
What about consumption stocks? and hospitals?
The consumption theme will continue as per capita disposable income rises, combined with a growing willingness to spend. Categories like automobiles, FMCG, and others are seeing premiumization trends, showing a shift towards higher-end products. Even liquor companies are benefiting from this. In hospitals and diagnostics, the per capita usage is low. Per capita bed per 1000 people in India is one of the lowest in the world. Our medical costs are low. So that's going to penetrate further.
How should one position their portfolio ahead of the budget?
Budgets in the last decade have not made dramatic changes.
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