There are two ways of investing in equity markets – Growth & Value

  • Growth style – Identify sector leaders, or identify scalable businesses with consistent sales, earnings, and return of capital employed. Provides compounding with less volatility and is generally followed with a concentrated approach
  • Value style – Investing is about finding value, this requires a much more hands-on approach and fund management skill, and comes in the category of high risk – high return & is generally followed by a less concentrated approach.

Last 3 years, the Indian market was ruled by a very selective growth style of investing. And, what did not work at all is the value style of investing. Hence, there is a huge GAP in Growth vs Value, and recency bias favors Growth.

But, the contrarian view sees growth companies at risk of high valuations especially in the context of today’s slow growth scenario. At the same time, there are many quality businesses available at the high investable – value and hence this contrarian view conveys that this is where wealth could see multiplication over time.

The value doesn’t necessarily mean Mid-Caps or Small-Caps. Value means Mis-pricing versus expected future earnings. There are many examples of companies across market cap from Mid to Large caps with high Investable Value. Value emerges owing to change in economic & business cycles, owing to lots of internal moves made by companies. And, also, all sectors do not perform together. Sector rotation also leads to the emergence of Value.

Today, given historically low-interest rates, stable government, and so many reforms have taken place over the last decade, the next 10 year period brings great potential and opportunity for Indian businesses to grow many folds. And, within this wave, those businesses that will adapt with time, & show agility to execute, will outperform. So, in this context, there is a possibility that many businesses that demonstrate value today, may become growth stories of tomorrow. Spotting these early is where lies massive opportunity to create wealth.

We at PMS AIF WORLD interacted with Mr. Aniruddha Sarkar (Co-Head Equities & Senior Portfolio Manager at Quest Investment Advisors Private Limited ) on spotting the mis-priced sectors and stocks in today’s context.

Watch the webinar recording

An insightful session on spotting the mis-priced sectors and stocks

The specialty chemicals sector of India has been one of the sunrise sectors.

  • India contributes roughly 4% of global chemical sales in spite of being 6th largest chemical manufacture – this shows a disconnect.
  • The type of CAPEX many of the Indian companies have done in past and have planned for the next 12-18 months, it is evidence enough that specialty chemical is going to be in the same phase as the Indian pharma sector was in 2008-09.
  • Indian chemical companies have an advantageous position as they have got strong backward linkages & joint ventures with MNC’s in the last couple of years. I believe Indian companies could gain further ground as global MNC customers would want to reduce dependence on China after the COVID-19 pandemic and shift their supply chains.

Stocks to look out for next 3-5 Years – Vinati Organics, Atul Limited, Navin Fluorine. (They can easily grow at annualized 30-40% over next 5-6 years)

The worst is over for the pharma sector.

  • Indian pharma companies have learned from the tough times. They have rationalized their costs and are now selective in their new launches now
  • The main growth drivers are Innovation and R&D, Medical tourism, Infrastructure development (India has the highest number of US-FDA compliant plants outside the US), Strong drug manufacturing, Strong domestic demand.
  • The challenges are significant but there is value in the sector.
  • Fundamentals are expected to improve gradually and positive earnings growth is expected to happen from 2020-21

Many global companies now wants to move away from their Chinese sourcing & want sourcing from other countries.

This was one of the contrarian calls we took, and it played out exceptionally well in the last 4 months for our investors.

  • Interestingly, India is the largest manufacturer of motorcycles in the world and there is no reason we can not replicate the same in Auto ancillaries and other automobiles.
  • Auto OEM’s – With rural India being resilient to the recent economic sluggishness, we see farm income being robust. Bullish on companies with Agri exposure like Agri Equipment & tractors.
  • Stocks to look out (Auto): Escorts and M&M

Escorts: From being pure tractor company, they are now evolving as an Agri equipment company also and have entered into joint ventures with Japanese market leaders in the same.

  • A huge opportunity is seen but we do not have too many players to participate.
  • Stocks to look out: Dixon, Amber, Voltas.
  • These companies can become export hubs from India.
  • Voltas can take a large amount of market share in the export market, right now it is not much into the exports. Currently, it has 23-24% of the domestic AC Market. But it can be a big export potential in the coming years.

Telecom players are going to be a major beneficiary because they are going to be The facilitator of Disruption.

  • The industry is highly consolidated with two strong and one weak player in the 4G space.
  • ARPU growth in the sector has sustained unlike the past instances and more likely to improve in the forthcoming quarters. These players would become cash flow positive in quarters ahead also.

Both Bharti Airtel & Reliance have immense potential over the next 36-48 months because of rising ARPUs on the back of increasing bandwidth consumption.

  • It is a proxy on the GDP growth of a country. If the country has to grow its financial sector has to grow.
  • The way I see the financial sector is broken into 3 buckets: a) Annuity b) Lending c) Other Financial Services 
  1. Annuity Business: Companies like Insurance and AMC’s are going to be big beneficiaries. With the type of financial penetration on the insurance side and asset management, we are just at the beginning of the growth trajectory. With just 4-6% of penetration, we have a huge ground to cover.
  2. Lending Business: The big is just going to get much bigger. Roughly the lending business grows at 1.5 times the GDP growth rate. So, if the country’s GDP will grow at 5-6% in the next couple of years we can easily assume that lending business can grow by 8-9%.

Stocks to look out: Bajaj Finance, ICICI, HDFC

High Capex cyclical basket, Oil & Gas, Metal Stocks, Capital Goods & Infra to be avoided for the next 24-36 months. Even though some of these sectors might do well, we do not find the risk-reward favorable. 

DISCLAIMER: - This article has been prepared for information purposes and should not be construed as investment advice or recommendation, in whatsoever manner. This shares the views of a well-known portfolio manager as presented by him in an online webinar hosted by PMS AIF WORLD on 10th July 2020.

Past performance may not be sustained in future and so must not be relied upon for any comparisons or decisions, while making current or future investments.

For any queries related to your investment needs, book an appointment with our experts.


Do Not Simply Invest, Make Informed Decisions

imageBook a call with our Experts