How have you formed your portfolio now? What kind of games do you have in your portfolio if the horizon of three to five years and more seems significantly higher for India? Give the themes and other triggers behind them.
Thematically, we believe that one sector that has emerged after a long winter is real estate. So we’re very constructive on real estate as a theme because it’s not impacted by the dollar, it’s not impacted by crude. It is very less impacted by the movement of interest rates as well.
During this time, the entire overhang in terms of excess inventory has been more or less absorbed. So it’s a theme we like. Urbanization is a phenomenon of several decades and after the consolidation that has occurred through RERA, demonetization and GST, the organized sector is taking more and more part of the unorganized sector and it is a sector very large. It is now the largest employer of unskilled workers in the country. So it’s a theme.
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Second. like everyone else, we prefer banks and lenders to asset management and insurance in the BFSI space. We like pure lenders. They are ready for some very good times ahead.
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Third, automobiles in general. In two-wheelers, we had fewer sales in FY22 than in FY17. So there has been a lot of consolidation, a lot of suffering for both two-wheelers and four-wheelers and also for commercial vehicles. So overall, the automobiles are about to do well. Another theme we love is logistics. Leaving aside the recent IPO; most logistics companies trade at a market capitalization of Rs 8,000 crore or less, but there is a massive shift away from the unorganized sector towards the organized sector in logistics. Consumers have been spoiled by Amazon and Flipkart etc. providing high quality delivery at a very low cost. Businesses today want a similar type of experience. They want to know where their goods are. They want assurance of timing, price, etc.
It is therefore a sector that benefits from public infrastructure in terms of roads and direct freight corridors, etc., which are being built. It is a game about investments made by the government, but the benefits of which are derived by highly organized third-party logistics companies. Logistics is therefore another segment that we appreciate.
Finally, health is another sector where hospitals are benefiting from the growth of health insurance. They don’t pay for it. So we like hospitals as a segment. These are the four to five places where we find opportunities and we are quite confident about our portfolios going forward.
What do you think of small and mid caps which have started to correct due to overvaluation? Has the foam been cleaned up from there? Have earnings been acceptable in your opinion, because there was a moment in October last year when the narrative started to emerge that the earnings quality and valuations of the small cap universe are going in opposite directions?
Obviously there has been a cleanup. There had been a euphoria that benefited the IPO market. The IPO market and the small cap market were helping each other to climb higher and higher and eventually became unsustainable at some point.
What followed was kind of a correction that we saw but overall there is optimism in the economy and small and mid caps tend to do well because people want to experiment . When there’s pessimism in the economy, when there’s low growth, then there’s a flight to safety and size is a proxy for safety and so there’s a preference for bigger capitalizations.
As we look more optimistically on the Indian economy, small and mid caps should do well. People should take more risk and what we have already seen is that there is an increasing participation of retail players in the equity market and retail tends to seek these opportunities more ascending. Thus, the confluence of growing optimism and increasing retailer participation should help support growth or returns for small and mid caps going forward.