market: FMCG and consumer durables poised for growth : Trideep Bhattacharya

Market also had a very quick and sharp haircut on Tuesday, but then rebound equally sharply, barely giving anybody to deploy extra capital which was sitting on the side. I want to understand from you that the way messages from the government side of continuity and all the five most strategic and core kind of ministries were retained by BJP, so there was no compulsion of a coalition kind of politics displayed when the portfolio allocation was happening. Is market really taking heart because market up till now has really liked the work done by our external affairs ministry, finance ministry, even oil and gas for that matter, on various stuff?
I would say that the results of elections this time have been sensible rather than sensational and that is the direction of a policy direction going forward as well. I think the market has taken comfort over the last few days since the election result has come out, until yesterday that the ministries have been announced that broadly speaking the policy directive is likely to remain the same.

And given that people who had done better, good work in the previous regime have been given the second chance also shows that to a certain extent from market standpoint uncertainty is not likely to be very high.

The next important signpost, of course, for the market would be the 100-day plan and of course the budget which will show us the way forward. But I think all indications are that it will be more of a continuation with the sector leadership remaining the same rather than anything materially different.

It appears that the way the first file which Prime Minister actually signed after taking office was towards the agri and rural side. I want to understand and of course the lenders which catered to the small borrower got very excited. I want to understand in your portfolio would you be taking a re-look at how the bottom of the pyramid, the suppliers there, be it consumer durables, retailers, lenders, who actually up till now were a distressed lot to a certain extent, their fortunes are likely to get reversed in this new term because the focus of the government will go there, how are you looking stocks in that area?
Over the last three to four months we have actually added to what you describe as the rural part of the pyramid or the bottom end of the pyramid, both on the FMCG side as well as a couple of names in the consumer discretionary side, not that we had an idea about the elections but more so because the forecast where that the monsoon is likely to be better than normal and if you look at the stretch of valuations on one side we have the industrials which had done quite well and on the other side you had the FMCG or some of the consumer exposed names at three-year low relative valuations. So, we took advantage of that and kind of have added to actually FMCG and IT over the last three to four months and hence in that context when we see announcements like this, this is likely to be helpful particularly to the rural end of the pyramid but also mind you if the monsoon comes out better than expected, then I think it will add fuel to the fire and that segment of the market which has been reeling would actually kind of see some light of the day.Especially I see names like Coforge and I am taking this name only for illustration purpose but this category Coforge, Persistent, KPIT, the mid-tier IT companies which are also aggressive on M&A have shown much higher growth and profitability and today I was reading commentary from one of the Coforge senior management in one of the pink papers confidently claiming that they will outperform their peers as far as growth is concerned. How are the valuation of this universe? I want your thought on the valuation and the earnings argument in terms of growth which it offers.
On IT side I would say first of all earnings are bouncing around the bottom. We do not expect miracles over the coming two quarters, but as you move towards next calendar year and practically from next fiscal year standpoint when global recovery will take shape in some form or the other, you could see a bit of gradual rebound in earnings post normalisation in the post COVID era. So, what I mean is during the COVID era there was clearly amplified spending in IT which got normalised in the subsequent two years coming out of COVID and now we are kind of at the fang end of that and as global recovery takes over you would see that IT spend over the next 9 to 12 months would actually gradually recover.

Hence, earnings are actually bouncing around the bottom, that is one part. The valuation part, I think post the last result season, the valuations of some of these mid-tier IT companies have also corrected and are more reasonable now relative to kind of rest of the market, so that is another area where we have added over the last three to five months and we still think that again overall with the expectation that nothing really great will happen in the next couple of quarters but over the next four quarters things will actually turn for the better than for worse.

I notice you mentioned names like Havells and Dixon. What I’m interested in is understanding the consumer durables and air conditioning sectors. There seems to be a significant gap: while consumer durables are booming, air conditioning hasn’t kept pace. Given the “Make in India” initiative, do you view electronic manufacturing as a long-term opportunity? Historically, margins in this area have been quite low. If volumes increase, do you anticipate that margins will also improve?
What I meant earlier is that the end industry for the segments you’ve mentioned targets the lower to middle segments of the market. We’ve recently added to both the FMCG staples and discretionary sectors in this area over the last three to six months. Overall, I believe the next three years present more of a growth opportunity than a margin opportunity. However, over the next 5 to 10 years, as companies currently operating at the lower end of the value chain move up, we will likely see a shift in margins.

Currently, in the EMS sector, India is establishing its presence at the lower end of the value chain, positioning itself as an alternative to China and a few smaller countries. The goal is to prove that India can execute with zero defects and establish a strong reputation among customers. This is similar to what happened with IT services around 1999-2000 during the Y2K period. As companies moved up the value chain into areas like package implementation and consulting, margins improved over time. That phase for EMS is still a bit distant. In the immediate future, the next three years will likely be characterized by strong growth opportunities. It’s important to be part of this journey, provided the company generates cash.

What are your thoughts on some of the deeper auto ancillary players that are involved in higher-end manufacturing? Bosch is one example, and Uno Minda recently had a massive tie-up for EVs, leading to a stock re-rating. The larger point I want to understand is the distinction between higher-end auto ancillaries with advanced manufacturing and design capabilities and the lower-end, commodity-type auto ancillaries. Which end do you think will see higher earnings growth and better valuations over time?
I would categorize the auto sector differently, so let me explain. I would divide it between OEMs and ancillaries, domestic and overseas, and between EV and non-EV exposure. Currently, my positioning favors domestic, two-wheeler OEMs over ancillaries. This preference is driven by the challenges in global growth and the strong performance of specific local market segments like two-wheelers.

Looking ahead to the next 12 to 18 months, as global growth improves, I would consider companies positively impacted by the EV transition over those at the commodity end, despite potentially favorable valuations for the latter. While we cannot go stock-specific, this is broadly the framework we use to navigate the auto space. Our approach is more stock-selection driven rather than top-down.

Through your largecap and midcap portfolios, how are you getting a sense of earnings visibility for the next two to three years? Gautam Duggad recently highlighted that corporate profitability has been rising sharply over the last three years and is likely to improve further in the next two to three years. Are you seeing similar trends when you speak to the managements in your portfolios?
We are currently in the third or fourth year of economic recovery following the COVID era. Typically, economic momentum, reflected in the growth of large, mid, and smallcap companies, starts narrow, focusing mostly on largecaps, and then broadens to include mid and smallcaps as the recovery takes hold. That is where we are today. I agree that economic recovery and earnings momentum are becoming more broad-based, with a higher growth rate in mid and smallcaps compared to largecaps due to their lower base.

Additionally, the recent election outcome provides policy stability for the next five years, suggesting continuity with minor tweaks rather than major changes. This environment is likely to support robust growth in the mid and smallcap space, outpacing largecaps. Despite higher valuations in mid and smallcaps, their significantly higher growth potential justifies selective stock picking within this segment, rather than avoiding it altogether.