Here're 3 themes to play on India growth

As domestic growth prospects remain promising, backed by capital investments and policy support, Ambit Asset Management is betting on three major themes to play on India’s story.

Mass consumption, manufacturing and industrial, and exports are the three major themes that the asset management firm is bullish on. “We are becoming increasingly positive on the mass consumption theme, driven by the recovery in the Hindi belt, deflation in raw material prices, and large companies taking aggressive price actions,” said Bhargav Buddhadev, fund manager at Ambit Asset Management, in an interview with ETMarkets.

Buddhadev holds a positive outlook on the manufacturing and industrial theme, as he anticipates a revival in private capital expenditure. Lastly, he favors the export theme, given the government’s implementation of various policy initiatives such as signing FTAs and incentivizing several sectors through PLI schemes. Edited excerpts:

What’s the fate of mid- and smallcap stocks after the recent stress test results released by AMCs?

Bhargav Buddhadev: We believe there has been some froth in the smallcap segment, given that the price performance for several stocks has been significantly ahead of fundamentals.

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If we examine the top 10 performers in BSE Smallcap 250 index from April 2023 to February 2024, we note that the share price surge has exceeded 300%, but the earnings per share (EPS) growth in the 9 months of FY24 has been only around 30% YoY.

Moreover, these stocks saw a share price increase of 8% CAGR over FY19-23, compared to an 8% EPS CAGR.

Interestingly, three of the names on this list have a free float of less than 20%. Historically, earnings growth and share price growth have generally converged in the long run, and there is no reason to expect this time to be any different.

There’s a lot of hullabaloo over whether valuations of smallcap and midcap stocks are stretched or not? Which side of the argument are you backing?

Bhargav Buddhadev: Premium valuation of smallcaps over largecaps is justified to the extent that it is backed by fundamentals.

Small companies typically offer higher growth potential over extended periods compared to mature businesses. Therefore, if there is a consistent track record of growth, premium valuations are justified.

If we compare our smallcap portfolio to our largecap portfolio, the P/E for smallcaps is at a premium of over 20%. However, the EPS CAGR for smallcaps is also higher at 28% in FY25, alongside an attractive RoE of 20%, leading to a price/earnings-to-growth (PEG) ratio of less than 1x for FY25.

We believe smallcaps should not be viewed through a different lens, especially now, given that several companies have also become liquid. In fact, the largest smallcap company has a market capitalization of approximately $3 billion.

How does FY25 look for India Inc from an earnings perspective and investment opportunity?

Bhargav Buddhadev: We expect FY25 to be a year of higher revenue growth rather than profit growth. We have observed many companies announcing price cuts to regain lost market share.

Post-COVID, several companies had implemented price hikes, leading to the resurgence of unorganized players driven by widening gaps between organized and unorganized players.

With key raw material prices deflating, large players have begun to implement aggressive price cuts to regain market share. We believe this should be viewed positively, as regaining market share is typically followed by improvements in margins and, consequently, profitability.

Which are the domestic themes that you think aren’t still overdone and hold potential to do well in the near future?

Bhargav Buddhadev: We are becoming increasingly positive on the mass consumption theme, driven by the recovery in the Hindi belt, deflation in raw material prices, and large companies taking aggressive price actions.

Additionally, we hold a positive outlook on the manufacturing and industrial theme, as we anticipate a revival in private capital expenditure due to 78% capacity utilization.

Lastly, we favor the export theme, given the government’s implementation of various policy initiatives such as signing FTAs and incentivizing several sectors through PLI schemes to enhance the return on capital employed (RoCE) in those sectors.

Chemical and consumer discretionary companies are also becoming attractive from a valuation perspective. Prices appear to have bottomed out in chemicals, and market share gains should act as a catalyst in consumer discretionary.

Currently, in which segment of the market is the risk-reward favourable and are offering long-term growth opportunities?

Bhargav Buddhadev: We believe the risk-reward ratio is now favorable for growth stocks over value stocks, given the significant re-rating observed in value stocks.

Over the last three years, several growth stocks have experienced PE de-rating as capital flowed towards value.

With value stocks now becoming expensive and growth stocks likely to continue reporting double-digit growth alongside double-digit ROE, capital should begin to flow into this category.

With the Fed retaining its guidance of 3 rate cuts in 2024, what does this mean for a market like India?

Bhargav Buddhadev: Rate cuts are positive for emerging markets, as lower rates tend to attract higher flows. Within the EM pack, India is the fastest-growing market and, therefore, should emerge as a beneficiary.

If we consider MSCI weights, the gap between India and China has now reduced to 7% from 22% in FY18, implying that India is likely to attract more flows at the margin.

It’s worth noting that foreign investment in India totals around $0.6 trillion, while in China, it amounts to $3.6 trillion. Even if 10% of this moves to India, foreign ownership in India could increase by 50%.

PSU stocks had a stupendous run in FY24. Is there more steam in this euphoria?

Bhargav Buddhadev: The power theme within the PSU sector seems promising, as there are discussions about a peak power deficit of 10% in 2030 during non-solar hours despite the addition of 260 GE of capacity.

This indicates that power generating companies and distribution companies should perform well. However, regarding most of the other themes, we remain skeptical as there seems to be more hope than actual earnings driving the stock prices.

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

William Murphy

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