portfolio rejig: Why export-focused companies are poised for success? Venugopal Manghat answers

“The focus on exports is clearly very strong from the government side, as well as the country is doing well, the economy is doing well and one of the key ingredients of the forecasted growth over the next five to seven years is the exports component and that is what we are looking at to target and specifically the companies that are exporting and likely to do well on the export side over the next five to seven years,” says Venugopal Manghat, HSBC Asset Management.

First, I want to talk a little bit about this Export Opportunities Fund, the NFO. Tell us a little bit more about it as to what the rationale and the theme is.
Venugopal Manghat: This is focused on the export opportunities from India. So, we are looking at a universe of stocks or companies that would be having exports revenues of more than 20%. And it can comprise of both merchandise exports as well as services exports, both will have a place in the portfolio. It would be a flexi-cap kind of portfolio, which means that it can have large, mid and smallcaps across the spectrum.
The focus on exports is clearly very strong from the government side, as well as the country is doing well, the economy is doing well and one of the key ingredients of the forecasted growth over the next five to seven years is the exports component and that is what we are looking at to target and specifically the companies that are exporting and likely to do well on the export side over the next five to seven years.

Because in the backdrop of the outsized Fed rate cut, wanted to understand how you think the services piece, which is largely dominated by IT services is going to pan out.
Venugopal Manghat: Yes, I think of the overall services exports pie that India has, about 50% still remains IT services exports. While that has been doing well for some time, the growth rates have tapered off if you look at the last 25 years or so.

And we believe that the post COVID boom that the IT sector saw and the outperformance of stocks, that I think is behind now. You had a year or two of a little bit of underperformance off and on the sector coming back. But I guess the deal wins of the last year should come back and provide gains in terms of revenue growth. As we go forward, I think the second quarter should be better than the first quarter across or in general across the sector and as we go forward into the third and fourth quarters and probably into the next financial year, we should see better growth coming from the IT space.

But IT is not the only part of the services exports that we are looking at. We are looking at all other segments outside IT as well, of which engineering, research, and development and the professional management consulting, those are segments that are also contributing significantly to the services exports from the country. Manufacturing exports and especially pharma at that, do you think Biosecure Act could be one of those triggers that could boost that further?
Venugopal Manghat: Yes, I mean, multiple triggers to the export story. I think the government incentives are very strong. There is a large manufacturing capacity being built across multiple sectors. We are already taking market share in many segments in the global arena and the traditional export sectors, like gems and jewellery and textiles are now giving way or giving some market share away to newer segments like electronics and manufacturing, industrial goods, etc, and plus the what you mentioned, pharmaceutical ingredients, chemicals, speciality chemicals, all of those are now gaining market share within the global export space. So, clearly, we are looking at some of those opportunities as well and it should be an exciting phase over the next five years or so.
But what about the market expectation, because a lot of participants have been saying that we have borrowed returns from future, there is that expectation of a time-wise correction, was not really playing out and right now as well it is the frontline index that continues to do well, even though broader markets are a bit under pressure. Within this construct, how should one look at a bit of a portfolio rejig?
Venugopal Manghat: Yes, I think the markets have done extremely well over the last few years and having run up so sharply and we have not seen too many large corrections in this entire run up, barring 3% to 4% corrections intermittently in this last 12 to 18 months.

My guess is that, my sense is that the valuations have moved up and warrant some bit of profit booking, so that is what is seen in the broad markets, which is healthy as well. Given that valuations have run up and prices have moved up, they definitely warrant some profit booking. But the medium- to long-term story remains intact.

I think the economic growth expectations continue to be fairly strong. And on the back of that, I think the earnings growth expectations also remain fairly strong. So, with those as a backdrop, the markets are likely to remain fairly strong and positive over the medium to long term. In the very short term, given the run up that we have had in the markets, a time correction or a small correction in the markets could be expected.

We are already seeing that happening with the broad market stocks correcting more, the index being steady and one of the reasons for that is also that some of the largecap stocks or the index heavyweights are now getting back into favour and their numbers should get better maybe this quarter and going forward. Some of the sectors that were not doing well so far, like the consumer staples sector or the private banks, etc, those are also now coming back.

And so those are all large heavyweights within the index and therefore, the index is not really showing you that kind of weakness, but the broad market is seeing some profit booking. Over the last few days, we have seen stocks correcting quite meaningfully.