By Arun Malhotra
We believe that India is at the cusp of a significant earnings upcycle with increasing profitability and higher ROEs. The tailwinds are in the form of U.S tapering and increase in interest rates, which we believe will be gradual. U.S Valuations esp. tech valuations are crazy, and have already been corrected a lot. We see some hiccups on the domestic front due to state elections. All this could lead to volatility. This volatility should be seen as an opportunity to add good-quality stocks to your portfolio. The stock selection will become more important going forward an Investors should focus on the earnings and growth while the hope stories at crazy valuations will not do well.
In terms of sectoral preferences, we prefer Banking & Financial sectors, Insurance, IT, Pharma & Chemicals (Chine one plus factor), Real estate, and allied materials & Telecom. Banking will show higher growth in credit for both retail and corporates, and also higher NIMs due to increasing rates in the short term, while the peak NPAs are behind us and that will lead to lower credit costs, and maybe even write-back of some provisions.
We prefer ICICI, SBI, Kotak Bank, and Axis bank could be a dark horse that may surprise investors with better growth and profitability. Real estate is seeing a lot of activity in terms of new sales, Pre-sales and inventory are fast being absorbed by end-users. This sector comes out of a slump after 10-12 years of stagnant prices, and the financing cost/the mortgage is lowest at 6.5%. So a sweet spot for Real estate and allied sectors like Cement, Tiles, plywood, etc. We prefer big names like Ultratech in the Cement space and RE names like Oberai, Prestige, India Bull Real estate for the portfolio.
We will also see budgetary support for Infra and rural housing that should act as a short-term trigger for these stocks. We have already seen so many reforms and policy changes that happen throughout the year and the Budget may be more of a regular account of the government, with emphasis on productivity, Infrastructure building, Make in India, and the PLI schemes. The focus on rural and urban housing will be there, and stocks like HDFC limited will be a major beneficiary. Some rationalization of duties may happen for textiles, chemicals to give a boost to China plus strategy. We like Vinati Organics and Sumitomo Chemicals in that space. Insurance penetration is still low and we like ICICI prudential in that space along with HDFC Life and SBI Life.
(Arun Malhotra is Founding Partner and Portfolio Manager at CapGrow Capital Advisors. The views expressed are author’s own. Please consult your financial advisor before investing.)