Varun Goel on 3 themes one can invest in this market

How are you assessing the market construct right now with so many moving parts at play? The US equity market correction has just begun. We are seeing a reversal in the dollar as well, which typically has never been the case because in a risk of a scenario, you actually see the dollar hold up. But that is not really the case right now and of course, emerging markets are a bit of a divided construct as well, if you will.
Varun Goel: As far as Indian markets are concerned, a cyclical slowdown has been playing out for the last six to nine months and it appears that growth is incrementally going to get better. Of the three large reasons, one, of course, is the significant monetary tightening that we saw in the last 12 to 18 months has ended. We have seen a rate cut already and our sense is there might be one or two more rate cuts during the course of this year and significant restrictions which were imposed by RBI have also been eased off.

Second, of course, has been the large tax cut announced in the Union Budget.

And third, there has been a fairly good rabi crop and the farmers will start getting money in their hands in March and April. Because of all these factors, we believe the growth will start bouncing up from April, May onwards and Nifty earnings which had come down to low-single digit in the last financial year, which is FY25, should start going back to that 10-12%, which is the 30-year average and hopefully the markets would also converge in that direction.

What is the theme that you like at this point in time and what is that you do not like currently?
Varun Goel: The lending space definitely looks attractive, both banks and NBFCs. As I said, we are expecting rate cuts and significant monetary easing this year. Credit growth should also bounce back. Finally, the deposit growth has caught up with the credit growth rates and that will ease off the pressure as far as NIMs are concerned for both banks and NBFCs.

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Second, export-oriented sectors, be it IT and pharma, should do well. There has been a significant depreciation in the rupee, which will definitely boost the margins of a lot of these exporting companies. Discretionary consumption as far as your low-ticket discretionary items in India are concerned, that should also show good bounce back as the benefit of tax cuts start showing the impact. So, there are a lot of sectors which should see good earnings growth coming back in FY26 and we are selectively participating in those spaces.What specifically are you pencilling in for the Indian IT space because like you briefly touched upon the rupee, that seems to be reversing a bit. Give us some sense also where do you see rupee headed and along globally what we are seeing is that the global IT companies seem to be a bit under pressure. A rub-off impact could definitely come into the Indian IT players. Help us understand what is making you bullish on this theme?
Varun Goel: The North American BFSI space, which contributes to one-third of Indian IT companies’ revenues, has been doing quite well; while last year was fairly muted for them, this year onwards we have seen a more positive commentary, larger deals coming in. Of course, in the short term, there might be some noise about the slowdown in growth and various news flows related to that, but broadly we are seeing more outsourcing activities as far as the insurance, mortgage, and banking sector in the US is concerned, which will definitely help Indian IT companies. Overall, as we see the transition, a lot more use of AI technology, a lot of Indian IT companies will participate in that growth story in their own unique way and as such we remain positive, both on the revenue growth side as well as on the margin side. As far as rupee depreciation is concerned, we have seen fairly sharp rupee depreciation after almost two years of stability in rupee and our sense is we are unlikely to see rupee going back to the levels it was in the last calendar year. Some of this rupee depreciation will sustain and IT companies might be able to squeeze out some margin benefits from that going forward.

I just want to get back to the point that you were making on financials and banks and NBFCs. Would you make any distinction between either corporate lenders, the private sector enterprises or for that matter, the PSBs and what to do with MFIs? Does it seem like that segment could have bottomed out?
Varun Goel: While the retail lending segment continues to do quite well and the growth there will sustain, we are also seeing some curbs have been eased off on the personal loan, the credit card segment should also see revival in growth. Mortgages continue to be one of the very large spaces which continues to do around mid-double-digit kind of growth rates, which should sustain.

The SME sector continues to do well. Again, we do not see any sign of credit problems in some of these sectors. Corporate lending is something which was very slow, in high single digit for the last financial year and that is where we would expect some growth uptick to happen as more and more private capex happens during the course of the next 12 to 18 months.

So, broadly, most segments of the banking space look decently fine in terms of both growth rate and asset quality. MFI has been through a downturn, and it may still take one to two quarters before the pain there goes away completely, but the worst might have been seen in terms of delinquencies and NPAs and incrementally, things may start getting better, although full recovery may be one to two quarters away.

How are you positioned right now when it comes to the realty pack? It has been thrashed out in the recent market correction for sure and many are talking about how maybe from those COVID lows, the realty market may have peaked out in select few pockets. And this at a time when pretty much every regional player is becoming very aggressive and trying to become pan-India. How do you think the sector dynamics are positioned right now?
Varun Goel: I would remain extremely positive on the residential real estate space. The last time the cycle peaked out in 2012-13, the EMI to take home salary ratio had gone up as high as 46-47% and that really indicates poor affordability. If we look at the pan-India numbers today, we are nowhere near that. We are more like 36-37% on a pan-India basis.

Yes, there might be some pockets of froth, but broadly the residential real estate space remains attractive. In this cycle, we see much better regulation post RERA. We also see a lot more end user demand. While there are pockets where investors are dominant, but largely the demand has been led by the end user and we believe 4-5% kind of pricing growth, 6-7% volume growth can lead to 10% to 15% kind of top line growth for most developers. As such, we remain quite constructive on the space.

How are you positioned right now on consumption and ex-staples, but everything from hospitality, to aviation, to even apparel, etc?
Varun Goel: Travel and tourism remains one of the most attractive pockets as far as the discretionary consumption is concerned. Hotels continue to be in a scenario where supply is going to be tight, at least for the next two to three years. The room rentals will remain strong. Travel, again, airlines should continue to do well because the yields seem to be fairly attractive and when you combine that with the cooling of crude oil price, which looks like crude will be softer this year, I think that is an added benefit.

So, that is something that we are seeing increased propensity by middle class India to consume on travel and tourism, hospitality, and that is something that continues to do well. Low ticket discretionary consumption, consumer durables, also is a space which should do well, once the benefits of tax cuts start reaching the hands of the salaried middle class. So that is, again, a space which should see better times going ahead.

What is your take on the two-wheeler auto space? After an almost 50% correction in stocks like Hero MotoCorp and Bajaj Auto, do you feel that the valuation comfort is getting back into this particular space because I was just seeing that on a one-year forward basis, stocks like Hero MotoCorp trading at just 15 times, Bajaj Auto 21 times. That premium is still there for Eicher Motors at 26 times. What are you making of this space?
Varun Goel: The auto space continues to be in the midst of a big disruption. As we move from ICE to electric vehicles, there will be some winners and losers. Our preference from auto space continues to be on the tractor side. Somewhere we are seeing signs of a cyclical recovery. While last year was tough, we believe this year should be fairly good for the agri sector and the tractor as a space should do well. Also, SUV players continue to gain market share. We have seen that compact cars are continuing to lose market share and the SUVs continue to gain. So, those players which are geared towards the SUV demand, both electric and ICE should continue to do well, so that is where my preference would lie in the auto space.

Whatever happens to the erstwhile defence and railway theme? CG Power has got a Rs 400 to Rs 450 odd crore order for Vande Bharat trainsets. BEL has been seeing consistent order flow. They secured another set of orders worth about Rs 843 crore as of yesterday. These were the first sectors where the first signs of a sell-off in the mid and smallcaps actually came about. Do you think they are ripe enough to start adding positions again or is that kind of heyday rally not going to come back in railway and defence names any time soon?
Varun Goel: Data which has been coming out shows that from December onwards, central government’s capex has come back in a very strong manner and our sense is that they will be very close to the revised estimates for FY25 and FY26 also we should see a good growth. So, broadly, if you look at the direction for the next three, four, five years, we expect good capex as far as the defence space is concerned.

For the railways, the budget this year was largely the same as it was last year. Having said that, most of the stocks in the defence and the railways, especially the PSUs, had run way ahead of fundamentals and in some cases, the multiples had been 70, 80, 100 times and there has been a meaningful correction in some of these names and some more could happen going forward.

But selectively, the growth story is very much there and one has to pick and choose the right names. Selectively, capex will continue to happen in power. Power transmission and distribution looks much more interesting. Select defence and railway stocks may also do well if bought at the right valuation.