Well, overall, this earning season has not really begun on a good note and I think that is part of the reason why the market is sideways. Apart from the fact that FII exodus and outflows are really continuing. What do you think is going to be the trigger for the market to turn around and head towards that 26,000 mark?
Madanagopal Ramu: See, we have been writing even six months back that earnings has started disappointing at the top line level even much before. Just because we had some commodity tailwinds last two quarters of FY24 was better, but FY25 Q1 was weaker and Q2 is much weaker and I think this margin tailwinds will keep going away in the second half of this year as well.
So, you should be prepared for some disappointments going ahead as well. So, that will keep the market in a tight band. If you look at the overall index level, I do not think you can see a breakout in the near term.
If you are investing in largecaps, you should probably be happy about a 10% to 12% earnings growth and similar sort of returns. If you are in a mid and smallcap, if you can choose the right stocks, you can still find in India high growth sectors.
If you are investing in the high growth sectors, you can expect a 20% earnings growth. But if you are going to be a diversified investor with a large amount of mid and smallcaps, then you should be prepared about earnings disappointment in that space as well.
So, broadly, what I am seeing is this very high amount of participation in earnings growth which was primarily contributed by commodity tailwinds last year. It is going away. And now the earnings growth should be skewed towards few sectors and few stocks, so that is something you should be prepared for. Which are these few sectors and few stocks where the earnings would be skewed and where you are seeing more than 20% growth?
Madanagopal Ramu: See, we feel that India is still a growth country and when the growth is happening, certain traditional sectors probably may not contribute to the growth the way they have been growing in the past.
So, if we look at from here in the next 5- to 10-year time period, you can really bet on sectors which are in financial space, consumer discretionary, and e-commerce space and then these are the areas where you need to spend more.
Manufacturing actually has picked up momentum in India. There are specific sectors within manufacturing which you can focus. So, we feel broadly if you are in the energy space within manufacturing, in the consumer space if you are in the travel, entertainment, QSR, hospitality, organise retail, these kind of areas will look interesting.
Within the financial space, you should be more towards retail, particularly low-ticket NBFC sort of areas. I think these are areas where the growth is going to be substantially better than what you can get from a largecap Nifty.
So, these are the areas that we focus, we actually see as an extension of PEs. So, wherever PEs are very active and PEs are actually investing, these are areas where we also spend a lot of time to understand and invest into.
You are positive when it comes to consumer space, manufacturing. These are the pockets that you are looking at. But which other spaces you would recommend staying away from because I am just looking at some of the notes and it does say that you are not that enthused about oil and gas and power, both the themes which have done very-very well for themselves over the last 12 to 24 months. Is it just valuations that is keeping you away or there is some fundamental change here?
Madanagopal Ramu: So, actually, we are positive on power. I think if you are looking at our holdings, we have sufficient exposures towards both renewable energy and even the thermal energy. We have BHEL as well as we have Premier Energies, which is a player in the solar space. And we also have exposure to the transmission and distribution space as well. Overall, we are very positive on power as a space because for the last four-five years, the power sector has not seen the sufficient investment.
And now, because of energy demand going up, I think power is a sector which you can play as a structural story for next three-four years also. We do not see this time the cycle being short term or ending up much earlier than what it happened in the last cycle.
We feel that power sector is definitely an area where you can actually buy into dips and there is a real story to be played out because competition is also lower in that space.
But if you look at oil and gas, we have never been very positive. We feel that slowly as a country and globally, we are going to go towards renewable energy. Even in mobility, we are moving towards electric vehicle.
So, oil and gas is probably best played as a value whenever there is an opportunity, but I think you cannot take really two-three year view on oil and gas.
We actually say value migration will happen from electric vehicle and new energy sectors occupying more space compared to oil and gas space in the Nifty at this point of time.
But just on consumption, a bit more detail because I see Trent as one of your top bets there. Just wanted to understand what have you been doing with your exposure, that have you increased it further with the kind of performance that you have seen and the fact that they are getting to a lot of other competitive space like lab grown diamonds, etc, or are you booking some profits now given the fact that stock has run up meaningfully?
Madanagopal Ramu: So, Trent we picked almost six years back when the stock was almost like Rs 350. So, it has been a multi-bagger for us. And the reason why we picked up in that point of time was compared to FMCG companies, you can really bet on Trent because the growth is going to be meaningfully higher and the management surprised us further because the kind of way they turned around the Zudio and then grown it, that really surprised us.
While we bet on the Westside, Zudio was actually a bonus for us and that led to a substantial value creation in the case of Trent. So, these are managements you cannot be away from. You can actually trim them if they have run up and the weight is much higher in your portfolio, but you cannot really go against these managements. They are going to keep surprising you.
And we actually added Zomato also two years back and that has also done well. So, these are kind of companies and managements which you want to bet because they are going to go and identify new opportunities in the market. And since the overall sector itself is growing much better because these are discretionary spending and as the household income grows, these are always retail is going to do well. So, you can trim the weight, but you cannot really be out of these names.
I do not think it makes sense to replace them with names like HUL or something because HUL may not be able to grow more than 10% in the next three-four years but if these guys can add new verticals, new markets, I think they can always keep growing anywhere closer to 20%. So, we have reduced some weight, but these are managements which we will keep on betting on.
You also seem to be quite bullish when it comes to the auto and the auto ancillary space. Are not you worried about the valuations and the slower growth that has been expected from the sector going forward?
Madanagopal Ramu: Again, we are very specific here. We have not touched too much of two wheelers here. We have played Mahindra & Mahindra primarily from an SUV premiumisation story. Again, a classic management turnaround here. The business has been struggling by being present in segments which have not been growing, but they realigned it beautifully last three years.
They have launched new products which have done really well and I think they are getting into EV also with a lot more focus. There is a long way to go to make money in this idea. We also are betting on electric vehicle as a space to do well. In the auto anc space, if I look at Exide and Amara Raja looks very interesting, primarily because they are investing into the battery manufacturing capacity.
The scalability of this business is huge and you have to give them some time. It is not something which you can expect immediate return. But if you invest into them and wait for two years or so, I think as their plans get commissioned and they keep getting new orders, we feel that electric vehicle space as an opportunity is much bigger than what we are thinking at this point of time.
So, investors who have a slightly long-term orientation towards the investment, I think these are great opportunities to get in and these corrections will help you to get into those stocks where the market is looking more near-term opportunities.
Some of these value stocks will be left on the table for you. If you can pick them and stay invested for two years or three years, I think you can create much bigger alpha compared to what returns Nifty can throw to you.
