auto sector: Financials, capital goods likely to lead; expect rotation in defence, railway names: Gurmeet Chadha

“Companies like Voltas performed well initially, but their recent results, especially in the EMPS space, were disappointing. With per capita spending increasing, fast-moving electrical goods, home improvement, and auto sectors tend to do well,” says Gurmeet Chadha, Complete Circle Consultants

We are hearing reports suggesting an acute shortage of air conditioners and other consumer durable goods. Have you managed to get your hands on them?
There is indeed a shortage, and discounts have virtually disappeared, not just for air conditioners but also for refrigerators and air coolers. Companies like Voltas performed well initially, but their recent results, especially in the EMPS space, were disappointing. With per capita spending increasing, fast-moving electrical goods, home improvement, and auto sectors tend to do well. If we compare this to China, where per capita GDP grew by 13-14% over a 15-year period, the consumer durable segment grew by 20%, and the auto sector by 26%. This is more of a long-term play, and extreme weather conditions could provide a better entry point.What about the rest of the market? Just 20 minutes until Monday morning when we react to the exit polls. Should we do nothing until the June 4th decision?
No, stick to your plan. In the market, you have to work on probabilities. For a 100% probability, there’s a fixed deposit. Our stance is that there is a very high probability of continuity in government. I’m not a psephologist, so I can’t predict the exact number of seats, but continuity seems likely. Our strategy of buying on dips has paid off in recent years. The market has provided great opportunities in financials, which have struggled despite good earnings growth. With the 10-year bond yield dropping and cost of funds decreasing, financials should eventually recover. There is a strong order book in capital goods, with excellent numbers from ABB, Siemens, and Cummins. We are in a strong investment cycle. Stick to the basics. Heading into an event with FIIs being very short and light is favorable. I pray for continuity, and that’s why we’ve been buying on dips.

What is your view on the auto sector, given that data is expected tomorrow? Any surprises anticipated?
Not really. We expect the auto sector, especially four-wheelers, to do well. Four-wheelers have barely crossed 2019 numbers, while two-wheelers are still 10-15 lakh units short of 2019 levels. In 2019, we did 2.35 crore units pre-COVID; this year, we probably did 2020 if I’m not wrong. There is a long pending demand and some valuation comfort, particularly in Bajaj and Hero. Ancillaries like Sandhar have reported good numbers, and their mix of two-wheeler and four-wheeler is now almost 50-50. Uno Minda also has a good mix and offers convenience, safety features, and premium content in the EV portfolio. We like the four-wheeler space and have been adding Tata Motors to our portfolio.What is your take on Zomato? It has consolidated around 180 for a while now. Do you think the peak of 200 plus is gone?
No, we are quite constructive on Zomato. Barring the food delivery business, where contribution margins are now above 6%, gross order value is picking up, and they have added a minor convenience fee. Blinkit, their quick-commerce venture, has achieved EBITDA breakeven ahead of schedule and is showing strong growth. They have a significant data analytics capability, which can help them pivot and improve further. We are also positive on Policybazaar and other new-age businesses in our portfolio.

What about the entire PSU rally, especially in defence and railways? Do you expect a massive bout of profit-taking post-election?
There has been a great run in defence names like HAL, Mazgaon, Cochin Shipyards, and Bharat Electronics. However, valuation comfort is now receding, with many PSUs trading at high multiples. Some of this business is lumpy, and there are risks in defence contracts. We prefer PSU banks like SBI and Bank of Baroda, where there is still valuation comfort.

In railways and defence, it might be prudent to take some money off the table post-elections. Power finance companies are trading at high multiples, and some rationality will come. Trimming 10-15% of the PSU portfolio and being more selective post-elections is advisable.

Where do you think leadership will emerge next among large caps and Nifty constituents? Is it as obvious as private banks?
Leadership should return to sectors where the cost of funds is coming down, possibly with a rate cut cycle towards the year’s end. Capital goods and infrastructure are solid sectors. We also see potential in rural recovery, which should benefit auto, FMCG, and agrochemical companies. Financials and capital goods will likely lead, and there could be rotation from defence and railway names to these sectors.