Allow us to now speak about India’s strategic sectors, those that can pave the best way for the longer term. By that, I imply semiconductors and defence. The federal government is talking extensively about these sectors and planning for his or her growth—not instantly, however over the subsequent 5 to 10 years. Particularly, contemplating semiconductors, new-age applied sciences, and defence, how do you see the expansion of those sectors?
Manish Gunwani: These are very promising sectors, however they’re additionally well-explored. Actually, the problem isn’t their development prospects—these are clearly multi-year development themes—however relatively the valuations. These sectors have demonstrated robust development over the past two to a few years and are already well-owned. So, attaining an excellent risk-reward steadiness is troublesome. We do have selective publicity, however being massively chubby in these sectors is difficult at this level.
I desire a clearer understanding of how one ought to strategy sectors like consumption and auto. If we take a look at FMCG earnings up to now, there was solely a marginal restoration; total, efficiency has been relatively flat. FMCG staples haven’t finished exceptionally effectively both. Final time we spoke, you talked about that autos additionally look costly. So, at a time when the federal government is asserting a number of tailwinds, ought to traders give attention to earnings and valuations, or ought to they simply take a look at future potential and put money into these sectors now?
Manish Gunwani: It’s a bit difficult. As the federal government shifts focus from infrastructure to consumption, one may wish to play the consumption theme. However the query is how. As you famous, some sectors, like staples, appear costly. In autos, it’s much less about valuations and extra about long-term tendencies—know-how and model management—which stay unsure. A method is to speculate straight, however oblique approaches, comparable to by way of financials or web platforms if you would like publicity to client discretionary, could also be structurally higher than direct performs.
While you speak about platform performs, we all know there’s extra paper ready to enter the market. However throughout the present pool, how do you cope with valuations, on condition that many of those performs have already seen important run-ups?
Manish Gunwani: The shares have carried out effectively, however the attraction of web platforms lies in long-term margin potential. Traditionally, when these platforms have been small, margins have been X, however as they scale, margins can turn out to be 3X, 5X, or extra. Predicting long-term margins is troublesome as a result of these companies are usually “winner-takes-all”—most revenue goes to the number-one participant, giving them robust pricing energy. From a three-, five-, or ten-year perspective, some platforms can shock. Moreover, know-how platforms can simply increase into adjoining areas, leveraging the identical client base. Globally, many fintech platforms started with broking, insurance coverage, or lending, and later cross-sold extra companies. It’s necessary to think about the total addressable market alternative.
There’s usually a comparability between benchmarks and the broader market. Whereas benchmark shares are typically giant, midcap and smallcap valuations stay elevated and might have additional correction. When setting up a portfolio, what’s your tackle this comparability?
Manish Gunwani: You’re right—the broader market, in combination, is pricey. I personally discover 60-70% of it troublesome to put money into as a consequence of valuations. Nevertheless, we’re lucky to function in a fast-growing economic system with a big universe of shares. If we think about corporations with a minimum of a $500 million market cap and excessive development, there may very well be 400-500 choices. Choosing 50-75 corporations from this pool may outperform the headline index over a three- to five-year horizon as a result of development themes are rising—defence, semiconductors, AI, China-plus-one methods, international energy capex, and extra. Taking place the market-cap curve and choosing high quality shares continues to be worthwhile relatively than avoiding midcaps and smallcaps altogether.
However certainly there are pockets available in the market the place valuations are nonetheless frothy?
Manish Gunwani: Completely. Many inns, hospitals, cement corporations, and different capex-intensive shares commerce at PEs of 40, 50, or 60 regardless of minimal free money circulate. A whole lot of client discretionary shares are additionally costly. Even when the consumption story revives, India’s development is tied to the worldwide economic system. Assuming nominal GDP development of 10-11%, I discover it arduous to justify paying 70-80 PEs for corporations rising at 8-10%. So sure, roughly 60-70% of the market stays difficult to put money into.
