Vinit Sambre, Head-Equities, DSP Mutual Fund, has said the macroeconomic landscape is becoming challenging, as crude and other commodities inch up and can erode profit margins for various businesses.
Crude price have been inching up as tensions mount in West Asia. There are worries that if the Israel-Iran conflict blows up into all-out war, not just oil but also the wider economic landscape will bear the brunt.
There might be a slowdown in the momentum of capital expenditure as polls near, hence the markets could undergo a period of consolidation, Sambre, who specialises in the small and midcap space and has over 17 years of experience, told Moneycontrol in an interview. Edited excerpts:
Do you expect re-rating in PSUs going forward?
PSU stocks have undergone significant rerating in recent times, largely attributed to an improvement in their fundamentals. The profitability and Return on Equity (ROE) of PSU companies have notably increased over the past few years, primarily driving this rerating trend. The government has been actively emphasising the enhancement of governance standards within PSU entities. Top management in PSUs has been tasked with enhancing efficiency and increasing shareholder value.
Several PSUs hold dominant positions in their respective sectors such as defence and railways, where competition is minimal or non-existent. Additionally, new opportunities are emerging in these sectors, potentially leading to substantial growth prospects.
Given these factors, it is our belief that if PSUs maintain their focus on growth, operate efficiently and sustain superior ROEs, they have the potential to continue outperforming. While it's challenging to discuss rerating across the board, the outlook for outperformance appears promising.
What do you expect from the Centre after the general elections?
Historically, government activity typically slows during elections and it often takes time for a revival until the new administration assumes office. However, this time around, the government has instructed all ministries to draft a 100-day plan to ensure clarity on pending tasks if the incumbent government retains power.
Consequently, we anticipate a surge in activity in the latter half of FY25, which would typically experience a lull due to the transition period.
The 100-day agenda will prioritise heightened procurement activities across various sectors, including roads, railways, housing and water management. Furthermore, should the current government be re-elected, it would likely result in political stability, thereby fostering policy continuity. Notably, the current administration has been steadfastly focusing on digitalisation, manufacturing, infrastructure development, and implementing reforms.
We anticipate a substantial push towards reforms, with the government aiming to set targets for "Viksit Bharat 2047", envisioning India as a developed economy with a GDP of $30 trillion. This ambitious goal reflects extensive consultations and groundwork over the past two years, signalling a concerted effort towards long-term economic advancement.
Do you think Indian start-up segment (robotic, AI, energy, etc) will be the biggest theme that one should focus on for multibaggers in the long term?
At present, making a definitive judgment is challenging. Many startup companies face a fundamental issue with their business models, often struggling with suboptimal profitability or outright losses, resulting in poor returns on capital. We're exploring avenues which indirectly benefit from significant shifts in these sectors, seeking financially viable investment opportunities.
Take artificial intelligence, for instance. It's poised to revolutionise various aspects of human life. While concerns about job displacement exist, the sheer magnitude of work required suggests ample opportunities for Indian tech companies. However, it's imperative for tech firms to prioritise enhancing their knowledge base and technological infrastructure to capitalize effectively on these opportunities.
Similarly, the global imperative to address climate change presents substantial opportunities for engineering and capital-goods companies. Few of them would stand to gain significantly from the growing demand for climate-friendly solutions.
Do you see major divestment taking place after the Lok Sabha elections?
Historically, divestment targets have often fallen short for various reasons. Additionally, the dividend income from public sector undertakings (PSUs) has notably increased, thanks to improved profitability, alleviating the pressing need to raise funds through divestment.
Presently, the environment seems favourable for the government to raise substantial funds by selling minor shareholdings in select outperforming sectors such as power, oil & gas, without relinquishing control. This approach of marginal liquidation over a large-scale privatisation drive could also allow the government to meet its objectives well.
How do you see the market performing this year? A gain of 5-10 percent?
The macroeconomic landscape is becoming a bit challenging incrementally, marked by escalating crude oil prices and inflation in various other commodities. This upward trend threatens to erode the profit margins of numerous companies that had previously enjoyed favourable conditions, leading to robust earnings growth. Moreover, consumption categories are experiencing subdued demand, necessitating a revival for more widespread growth.
Additionally, there might be a slowdown in the momentum of capital expenditure as the government enters election mode. Taken together, these factors suggest that the markets could undergo a period of consolidation before gearing up for their next significant movement.
Will sugar stocks sweeten portfolio returns in the medium term?
Sugar stocks have evolved into a dual play, encompassing both the traditional sugar business and the opportunities arising from the government's ethanol blending programme. This diversification has brought stability to the earnings profiles of sugar companies and enhanced their structural health.
Despite encountering some near-term challenges such as a surplus closing stock of sugar at the end of the current season and unfavourable changes in ethanol procurement policies for the next two-three quarters, our long-term outlook for the sector remains positive based on the ethanol blending programme.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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