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Last Updated : Dec 22, 2017 12:08 PM IST | Source: Moneycontrol.com

Plenty of stocks in market which can give up to 20% CAGR return for next 3-5 years

There are many exciting opportunities in India across sectors which has potential to deliver 18-20 percent compounded earnings growth over next 3-5 years.

We are positive on auto ancillary, private sector banks and finance, cement, speciality chemical and consumer sectors. Many companies in the auto ancillary sector are becoming truly global, Rajesh Kothari - Founder and Managing Director of AlfAccurate Advisors, said in an exclusive interview with Moneycontrol’s Kshitij Anand.

Q. Work on Modi Sarkar's last full Budget has already begun. What are your expectations from the big event, do you think we will see a populist budget this time around?

A. A budget is no more a big event for Indian market since the last 7-8 years. It is more of continuing of the existing policy framework. Indian economy is slowly recovering from demonetisation and GST implementation issues.

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The biggest challenge is to increase the investment rate which has declined from 33 percent to 26 percent. There is no major pick up in the private sector capital expenditure. We expect the budget to continue to focus on investment which leads to sustainable growth for the country.

Q. What would you have done if you were the finance minister? What would be on your priority list?

A. Priority is to make policy attractive for huge investment – a) increase the employment opportunities, and b) widen the tax net by reducing the tax rates and making compliance easy.

Other important tasks -- c) make financial institutes (PSU banks) stronger by professionalising the boards. Unless we have strong lending institutes, we can’t get sustainable high-quality growth.

Q. What is your investment style?

A. Difficult to talk about specific companies but we remain fairly positive on the companies which meet our 3M Investment approach – Market Size (Size of opportunity should be large), Market Share (Top 5 players in the industry) and Margin of Safety.

There are many exciting opportunities in India across sectors which has potential to deliver 18-20 percent compounded earnings growth over next 3-5 years.

Q. After a blockbuster 2017, do you see domestic flows ebbing somewhat in the year 2018? If no, what is the kind of money you expect MFs to get in the year 2018? AUM level etc.

A. Financial savings are still at lower levels compared to physical investments. Within that, equity investment is just 8 percent of total financial savings.

Post demonetisation and lower interest rates, people have realised equity is right asset class for long-term investment. So I think it is just beginning. I think investors will use every decline as an opportunity to increase equity allocation.

Q. Which sectors are likely to see a ray of light in the coming Budget?

A. India is currently facing demand issues - the manufacturing sector capacity utilisation is currently 70-72 percent. Hence, it is important the government makes efforts to increase demand because private sector capex will improve only if capacity utilisation increases over 80 percent.

The government has already announced massive investment programs in roads, affordable housing, railways etc. – as that has a multiplier impact on GDP. So, that should result in higher demand growth over next 1-2 years.

Q. It has been a splendid run for markets throughout 2017. What is your expectations for the year 2018? Any big events which could derail the equity rally or market participants will be in a wait and watch mode ahead of general elections?

A. The year 2017 was indeed a good year for global equity markets and for India as well. We remain positive for the year 2018 as well as most big countries are likely to see better GDP growth.

India is on the cusp of growth. Positive Impact of structural reforms will start in few quarters. The biggest risk to India story is an increase in oil prices.

Q. The September quarter results were not that bad, in fact, there were more positive surprises than disappointments. Do you think we could see a double-digit growth in FY19?

A. Yes, that is very likely considering that overall capacity utilisation is still ~70 percent. So the improvement in demand growth will lead to better revenue and earnings growth.

Q. Which sectors are looking attractive or a possible play in 2018-19?

A. We are positive on auto ancillary, private sector banks and finance, cement, speciality chemical and consumer sectors. Many companies in the auto ancillary sector are becoming truly global.

They have scalable business models, right technology partners, and strong leadership positioning. Change in the regulatory framework will lead to increase in content per vehicle.

Sectors like cement will benefit from government affordable housing program. GST implementation will lead to the formalisation of the economy that will result in better growth opportunity for many companies in consumer-oriented sectors like tiles, plywood, building material, etc.

Speciality chemical companies will benefit from a structural increase in cost in China and strong R&D capabilities of Indian players.

Q. Equity truly outsmarted every other asset class barring Bitcoins. What are your views on this buzzing asset class? Do you think it is a bubble?

A. In long-term, the equity market is a mirror of earnings growth. During last 7-8 years, corporate earnings growth was 7-8 percent CAGR and Sensex delivered similar returns.

During next 3 years, as earnings growth improves, market has a potential to deliver double-digit returns - compared to fixed income which gives 4-5pc net of tax returns

Q. India Inc. raised over Rs 70,000 crore so far in the year 2017. What is the kind of fundraising you expect in 2018? Any particular IPOs you watch out for? And, which sectors are likely to dominate IPO activity next year?

A. I think IPO market to remain firm even for 2018. To some extent, it is negative as it takes away liquidity from the market but at the same time, it gives opportunity as many new sectors get listed. For example in last two years, sectors like life insurance, general insurance, asset management, retailing, got listed.
First Published on Dec 22, 2017 12:08 pm
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