MC Interview: Canara Robeco’s Shridatta Bhandwaldar lists his top sectoral picks

You don't want to get out of the industrial space just because the near-term valuations have increased. These near-term valuations could mean consolidation or even a decline in those stocks if the earnings growth doesn't play out. But that is not the thesis at this point in time, Bhandwaldar says.

Shridatta Bhandwaldar, Head of Equities, Canara Robeco, says financial, industrial, and consumer discretionaries are three themes he is bullish on right now. The auto sector, he said, is going to have a double digit or even higher than 15-20 percent earnings growth in FY24-25. That is why the sector is still looking interesting.

In conversation with Moneycontrol, Bhandwaldar also talked about his view on the industrial space and other themes he is watching out for.

Also read: Opportunity cost drives every investor's decision making: Canara Robeco's Shridatta Bhandwaldar

Unlike other segments where you can see that we are coming out of a resurgence, auto is different. How do you look at the segment?

Auto is an extremely competitive industry. While every industry is competitive; in auto, it is more evident because it's product-led. And you can see these products online. Identifying customer trends and selecting stocks based on the same is the key.

For example, in commercial vehicles (CVs), there is not much of a challenge, and still have 1.5-2 years of cycle. Then you have passenger vehicles. Here, you have to be very selective, like, in terms of SUVs and EV transition.

Then you have two-wheelers. It is about individual products here and EV transition and exports are the key driving area. So, when you get into the next stage, which is basically more nuanced, you have to actually go company by company, and proportion by proportion, in terms of where their earnings come from.

If you generally look at auto as a sector, I think volume growth will still be almost in double digits for most of the categories and you still have margin levers in the sector. For FY24-25, you are going to have double digit or even higher than 15-20 percent earnings growth in many companies. That is why auto is still looking interesting as a sector.

What are your top three bets in terms of either themes or sectors?

It is financial, industrial, and consumer discretionary. In financials, opportunities are across the board from a growth perspective, but at some point, in time, over the next two years, risk of aggressive lending may come back to hurt in the form of credit cost, which can impair earnings growth.

From that perspective, you favour either niche NBFCs (which have the advantage of delivering product services in a particular category, like microfinance, consumer etc.) or banking, where you clearly favour those who have the best liability—primarily larger names—because their CASA and their liability are far better.

This is going to be important as the credit growth starts moderating from the current levels of 15-17%.  When it falls to 11-12 percent, your liability cost differential becomes very critical in terms of how you can keep growing profitably.

Within general and life insurance companies, there are one or two names that we like, but there is nothing that excites us incrementally.

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Are you bullish on the AMC business?

While there are many well run AMCs, we relatively prefer market infrastructure/distribution players over mutual funds in the current context.

Many of these industrial stocks also seem to be priced to perfection or beyond. What is your view on the space?

Yes, valuations have moved. There will be consolidation in that space also, just like in the market. It is the earnings growth that is holding up and the order backlog and order intake remain buoyant. This approach  could be right or wrong but typically, when you get a cycle, particularly on the investment side, you want to see that data points have changed before you take the call – from a top-down valuation perspective, balance sheet perspective, etc.

When you look at it through those lenses, it looks like some of these trades can continue for three, five or 10 years. You don't want to get out of that just because the near-term valuations have increased. These near-term valuations could mean consolidation or even a decline in those stocks if the earnings growth doesn't play out. But that is not the thesis at this point in time.

So, of course, you have to keep a close eye. But, as long as there is no structural breakdown in terms of the incremental thesis, you don't want to necessarily change your thesis.

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