Capex stocks face valuation hurdle despite growth potential: Manish Sonthalia

“There is nothing in the micro markets to understand, everything has to be from a macro point of view, and the big call you have to take from a macro point of view and that is also going to impact India per se. So, given that largcap, midcap, smallcap, we are not talking about when the valuations are extremely elevated,” says Manish Sonthalia, Emkay Investment Managers.

Up till now we are putting a brave face, everyone is like yes US has gone down, dollar will go down, India will benefit. But there would be a threshold beyond which it will start hurting the world. Whether it is leverage, whether it is mark to mark losses, whether it is hedge funds, or whether it is ETFs, when such large concentrated trades in the world when they reverse so sharply, the unknown effect of that is actually very brutal for financial markets. More than anything else, I am actually worried about that.
Manish Sonthalia: Everything has a place. So, emerging market will have their place, you will have the developed markets have their place, all of this deleveraging.

So, the whole point is that whether the de-dollarisation of the world which has got started is going to gather pace or not gather pace. I am of the belief that de-dollarisation of the world and de-pegging of fiscal policies in emerging markets vis-a-vis the US dollar is likely to happen.

There is nothing in the micro markets to understand, everything has to be from a macro point of view, and the big call you have to take from a macro point of view and that is also going to impact India per se. So, given that largcap, midcap, smallcap, we are not talking about when the valuations are extremely elevated.

You are talking when the valuations have really corrected, flows have been negative. You can jolly well play with the momentum on the downside, but having said that I do believe that more than all the negatives already priced in the stock prices, as far as India is concerned and if we keep a lid on the QIP issues and the preferential issues and the private equity exits FIIs outflow and DII inflows would broadly match, that will again provide a floor to the stock prices as far as India is concerned.

What I observed is that when you talk about consumption, your tilt is still pretty much towards the entire premiumisation or urban consumption theme. Would you look at maybe some bottom-up stories? Rural consumption seems to be kicking back in. Should some of those staple plays which are directly linked to rural exposure or rural markets also be looked at?
Manish Sonthalia: So, there has been a saving of one lakh crore in the budget and that is saving on account of income tax. There has not been too much of a cut in GST. So, from that point of view, out of 7.5 crore income tax return filers, you have around 6 crore people who have an income of less than Rs 12 lakh. Now, these are the 6 crore people who are broadly going to benefit. And these are the guys who do not have to really be very worried about your roti and kapda, which is your food and clothing. So, that is the big call that discretionary spend is likely to benefit more than FMCG. And, of course, our finance minister has also alluded to the fact that GST rates are also headed on the downside. So, from that point of view, even FMCG at the margin will benefit and rural economy, in any cases is coming back from the lows and that is also going to be beneficial for the FMCG plays. So, all in all, the entire consumption basket is likely to benefit.

Maybe you are not going to see the impact only in the March quarter, but next two to three quarters, the positive impact of this is going to be felt because there is going to be a multiplier of this one lakh crores.

According to the theory of marginal propensity to consume, if you save 20% of this one lakh crores, the multiplier is going to be five lakh crores. If you save 25%, that is going to be four lakh crores. If you save 30%, then that is going to be three lakh crores.

And mind you, next year again, you have the 8th pay commission recommendations about to come in and we are talking about one crore plus government employees and the fitment factor which is being talked about is around 2.5 to 2.8, of course, that would again mean that salaries of government employees will likely go up by 25% to 30%.

So, again, from that point of view, we are looking at a situation where consumption stocks are likely to benefit. The benefit is going to be more pronounced, according to me, in discretionary names and both urban and rural discretionary names are likely to benefit, whether it be tractors, motorcycles, or white goods or so on and so forth, they are likely to benefit, rural, retailing, and all of that, as well as FMCG companies, where there is commensurate growth because the FMCG sector is lacking growth and elevated valuations. If the growth comes in, maybe the valuations will find a floor and maybe even move up from there.

But then what happens to capex stocks? Government spending there also will pick up. If numbers are anything to go by, they were down because of election spending and for next year also, the uptick in GDP in capital expenditure is 10%, which is quite a decent number. So, what happens to that end of the market? If someone has to choose, let us say, between built India and buy India, which is a better theme?
Manish Sonthalia: So, you are right government is doing its bit on capex. They have spent 3.1% of GDP on capex, 10 lakh crores for fiscal 25, 11 lakh crores for fiscal 26. Capital formation has gone up from 26% to 30%, that is about it.

I mean, we cannot expect the government to do almost all the heavy lifting, private capex has also to come in. So, it boils down to not the problem about capex, it boils down to valuation. Capex names which started with 20 PE and you elevate those valuations to 70-80 PE and they have corrected to, let us say, 50 PE.

The theme stays good, the growth stays good, that is the major problem in the capex stocks, capital goes, the power, the renewables, the infrastructure, roads, railways, defence, they are suffering from a problem of valuation.

The biggest problem in Indian markets today is nothing but the valuations. Each individual sector, company, stock if the EPS growth of the Nifty is growing at 10%, you cannot really be buying into companies, sectors, industries and more than 3 PEG.

We have seen that anecdotally. So, the problem of the capital formation stocks, capital goods stocks, infrastructure stocks is only the valuation. If the valuation is conducive, even those stocks will do well.