Renaissance Investment's Pankaj Murarka is bullish on new age tech, hotels sectors thriving post Covid

Pankaj Murarka

In an interview with CNBC TV18, Renaissance Investment's Pankaj Murarka discusses the current state of the market index, the sectors showing potential for investment, the prospects of emerging internet companies, and the outlook for the hotel sector. Pankaj remains positive on Indian equities, emphasising the importance of cautiously investing only in quality companies within mid caps and small caps.

He identified the capital goods and engineering sector, banks, and auto ancillaries as promising sectors. Additionally, Pankaj expressed optimism about the growth potential of internet companies and the hotel sector due to favorable market conditions. Edited excerpts:

The mid cap index is hitting record highs consistently. Would you say that we are now in an overbought zone? Or will the string of gains continue going forward?

Well, we continue to remain constructive on the outlook for the markets. It's in the very nature of the market that when markets are doing well, mid caps and small caps tend to do better than the large cap. And I think that is what we are witnessing.

While it's difficult for me to comment in terms of what will happen over the next one week or one month, but from a slightly more medium term perspective, over a year, we continue to remain positive on Indian equities. And we still think that the Indian economy is doing well.

If we look at the nifty index, it has consolidated for 18 months and has been around 18,000; earnings have grown at 20%. Plus, valuations have become far more moderate or reasonable in that context. I think the outlook for Indian equities continues to remain strong.

So we remain positively biased on the markets including mid caps and small caps. Having said that, I would only advise or caution that retail investors should be investing in digital innovation to good quality companies, because within mid cap and small caps, you also have lot of poor quality companies, and investors should avoid them.

Because you can see some price momentum and mid cap small cap stocks and markets are doing well. But those stocks then tend to correct very sharply whenever there's a correction in the market. So investors should avoid that and stick to quality directionally.

Any of the sectors that are looking good at this juncture where one should look at for investing? Autos have been doing well, this year, metals and mining have just started participating a couple of since a couple of weeks. Should it be banks? Should it be autos? Or would you take the contrarian view on IT and suggest investing in mid cap IT right now?

We like one sector which has done very well for us and it is the entire capital goods and engineering sector. We think we're seeing a revival of India's investment cycle, which was missing for almost a decade between 2010 and 2020. And there are very strong investments that are happening in the economy across public investment, where government and more importantly, private sector investment. So the entire engine engineering and capital goods sector and mid caps within that are doing pretty well.

I think the kind of order influx these companies are witnessing and the kind of momentum they are witnessing in their business, the sector will continue to do well. Apart from that, we like banks as well as auto ancillaries.

Over the last two years the auto sector was impacted around COVID when the sales plunged and thereafter for the last 18 months because of the chip supply shortages in the global supply chain issues with the sector in India and globally as well. But now those supply chain issues are getting normalised. So we like auto earnings, because the underlying demand in autos remains very strong in many of the passenger vehicles.

Even today, as we speak, there is a waitlist of anywhere between two months to six months. So the demand for autos remains very strong. And we think auto ancillary, ancillary companies will be a big beneficiary of that.

The street believes that tide has turned for most of these new companies like Paytm, Nykaa, policybazaar, etc. Your thoughts?

We are very constructive on internet as a sector. We think that India's internet economy will keep growing at 20 to 25% over the next seven, eight years, the rest of this decade, and will become very large by the end of this decade.

So effectively, the sector will grow three times faster than the overall aggregate economic growth. As high growth investors we tend to focus on high growth sector and this is one sector, which clearly fits in.

More importantly, the companies in the sectors after getting listed in the last one year, have made a very rapid pivot in their business from loss making to cash breakeven and cashflow positive. And we think these businesses will deliver very strong growth and will generate huge amount of cash flows going forward over the next decade or so.

So we have ownership in companies like Paytm and Zomato. We also like Napoli or info edge, and a couple of other names. We think that adoption of these businesses amongst consumers is still at an early stage. There are many more untapped consumers which these businesses will reach out to and more and more consumers will adapt to this digital offerings.

More importantly, they with the existing set of customers in mind, much more deeper combination of both these businesses will deliver very strong growth and very strong cash flow over the next 10 years. In fact, we think some of these companies will emerge as the fastest growing companies in India over the next 10 years.

What about some of these hotel names given the fact that there's very strong travel demand numbers. And also the stocks that have been doing extremely well such as HCl, Lemon Tree, do you think that pocket is worth investing in now? 

We do own Indian hotels, I think after a gap of almost 15 years, we are seeing an environment in the hotel sector where demand is outstripping supply.

The last 10 years post the 2008 financial crisis, the hotel sector was in an environment where the room supplies in India was far higher than demand. And as a result, these companies did not have pricing power.

But I think we've seen a very strong resurgence in travel and as a consequence, today, the demand in the hotel sector is far higher than the supply and as a result of which, there is a huge pricing power that has come back to the sector after a gap of almost 15 years.

I'm sure all of us know from our anecdotal experience that whenever we are traveling, either for business or leisure, hotel room availability is always a challenge. And more importantly, the prices today that we pay for hotel rooms is at least 30-40% higher than what we were paying pre COVID.

I think these trends will continue in the sector at least for the next five years. So yes, for investors having a three to five year time horizon, I think it still makes sense to invest in the sector. Having said that, the only thing I would like to caution is stocks in the sector have run up very sharply in the last 18 months.

So investors should invest in the sector with a slightly more medium term time horizon and not with a very near term time horizon.