EPC, capital goods space one of my top sectoral picks for the next 12 months: Aman Chowhan

We are also seeing rural slowdown in India so it will take some time, a few months for that to stabilise. So these two things will keep the earnings growth on check and at the same time as we speak there is a big mean reversion happening in the markets or in the corporate world.

The companies that benefited out of COVID are now giving away those benefits and vice-versa whoever lost margin are now recovering. Also, China is opening up, supplies from China are going to resume and so has been the demand. IT companies which had a good margin, are giving it up and at the same time chemical companies which enjoyed lower raw materials from China dropped due to COVID now again are going to get it so they are going to improve on the margins. So it has been a mixed bag in the near term, more of mean reversion and that is the reason I feel there is no major trigger in the market in the near term.

If China comes back which it should looking at they have already given a timeline on COVID reopening, could that pour cold water on all the inflation peak theory?
What can happen is that commodity prices can move up which is good for commodity companies but not for inflation. But I believe that reported inflation numbers will continue to come down because that is calculated on a YoY basis, it is more of mathematical number. So inflation base right now is so high that even if there is a 10-15% commodity price inflation coming in overall CPI, WPI will not see a very big impact.

Markets will continue to feel that we are closer to the peak of the interest rate hike cycle both globally as well as in India and that is something which bodes well for the markets. So yes China opening up can have a commodity inflation but overall I feel markets will take it more positively.

So in light of these concerns that you are flagging off, do you believe that the earnings growth as well is likely to take a hit for the year ahead?
Not really, as I mentioned the next one-two quarters seem to be challenging quarters on the earnings front more so because of the mean reversion. I think the normal growth which India is seeing both from the government spending levels and from the consumer level should start to pick up and hence a double-digit earnings growth for 2023 is definitely on the cards.

Given that the expectation largely is that we could see a smart credit boom taking place in India, how do you believe one should position themselves or what is the long-term outlook when it comes to banks and financials across the board?
Financials definitely are looking good because we are coming out of the COVID worries and with GDP as well as government spending looking up, credit growth is also in double digits and that should continue. Most of the banks will see lower NPAs, lower provisioning and hence the reported net profit growth is also going to be pretty strong. Valuations are not too worrying except for the large few retail based private banks which trade north of two to three times book. Most of the sector is closer to one, one-and-a-half time book and hence there is enough scope for that also to get rerated because most of these banks, the peak cycle was anyway between 15% to 18% ROE. So from that perspective, financials especially banks, larger NBFCs are looking good. Microfinance is one subsegment that is also looking good for the next year.

We spoke about mid-tier banks and railways as a theme. These sectors have done rather well. Have you added any new sectors or any new ideas? How many new stocks you have added let us say in last one month? How many stocks you have deleted largely because of valuations or your outlook towards the company changed?
I will say that we have exited two-three stocks completely mainly because the outlook for the company has changed. We would have added similarly two-three new names, some names in the financial space, some names on the quasi-consumption space.

Why do you like NBFCs? NBFCs will always underperform when the liability cost is going higher. NBFCs always have issue in generating stronger NIMs when the liability cost and the fixed deposits are moving to banks in a rising interest rate regime?
As I mentioned the leaders in NBFCs is what we like and these companies have a decently strong franchise and this year is going to be the year where growth is going to matter because not everyone will be able to grow based on the CASA and based on the liquidity.

NBFCs I feel are well placed because the market ultimate focus first is growth and second is NPAs. So the top NBFCs can deliver both growth as well as they can manage NPAs pretty well versus the other pack. So within NBFCs I will restrict myself to the leaders and there I do not see a challenge. Yes costs will go up but they are able to pass on the cost because they are operating in a space where banking is still not present, that is the reason they exist.

So if you stick to the leaders within NBFC space, I think there is still quite amount of valuation rerating which can come in.

Would you consciously keep on avoiding fintech stocks, they are reaching that level where the surprises will be more and the negative news will be less, are we reaching that point?
We are looking at a few names which are either profitable or are expected to be profitable in the near term. We have not yet acted upon anything but now clearly it is time to look at them. We have consciously avoided it for the last two years and hopefully in the next three, six months we should get a good entry point in maybe one or two of names in that space.

What is the general consensus on betting on the overall capex theme, would it be just isolated to capital goods or would it extend to infrastructure, defence, railways as well?

I think the next 12 months are looking very interesting for the EPC, cap goods space because post budget I believe the government spend should start to pick up ahead of the central elections and that is the time when most of the order books, most of the tendering will happen and that is something which is going to be very exciting.

So already these companies are doing well. They have a decent order book and the government spending is likely to accelerate big time over the next 12 months. This space definitely looks interesting. So definitely this would be one of my top sectoral picks for the next 12 months.

Let us talk about the underperformers of this year and that has been IT as well as pharma. Both of those indices have managed to disappoint this year. Do you think things will shape up differently in 2023?
I think IT could even outperform the market. Pharma could be a market performer because pharma is still reeling under high Covid base plus margin pressures in the US and the export market. So for IT it was more of a PE compression, companies were trading at 40 PEs which has come down to 20 PE. Growth is still intact barring a few margin pressures here and there and with attrition cooling off I think the worst on the margin front for IT companies are also behind us. So over the next two, three quarters I think IT should also start to pickup and hence I feel IT can definitely outperform this year, pharma could be more of a market performer for 2023.

What about the entire real estate and cement play. Would you rather play it with the real estate players, would you look at home building improvement space, consumer discretionary, durable etc?
We do not have any direct real estate companies in our portfolio and we play it indirectly via cement and building material segment. Cement, I think, Q2 was the worst quarter. Q3 onwards, from the current quarter we will see improvement, Q4 is going to be good.

In the near term cement definitely looks good because of the low base and because of the margin headwinds that they are facing is now going away. For building materials it has been a mixed bag, some segments have done well, rural focussed companies have not been doing so well because of the slowdown there. So one needs to be selective as far as the building material space is concerned but the outlook looks definitely good.

Last year has seen record housing sales over the past several years in the top metro cities. We expect this trend to continue and slight increase in housing loan rates is not going to have a major detrimental impact on the demand. The demand is genuine in India. It is highly underpenetrated, everyone around would want to upgrade their houses so this is a secular theme for the next multiple years. So demand is there, within that demand which companies are able to handle their profitability, the competitive intensity could turn out to be the winners.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)