Anil Sarin is the CIO at Centrum PMS.
“New-age tech companies are adding to quality of life, reducing costs, reducing frictions and creating demand. As such, they have a major contribution to India’s growth and employment. However, valuations have not yet reached attractive levels,” Anil Sarin, CIO at Centrum PMS, said in an interview to Moneycontrol.
“We are closely tracking performance and valuations, and will act when the time is ripe for investment,” he added.
There were questions over the sustainability of double-digit growth in corporate earnings given inflation concerns and elevated oil prices along with the ongoing Ukraine conflict.
“A lot will depend on events like the Russia-Ukraine war and the China Covid situation. If both these mega events are resolved, earnings will have a chance to recover. Assuming a prolonged continuation of these adverse conditions, double-digit earnings growth would be hard to achieve in aggregate,” said Sarin. Edited excerpts:
What are the key risks the market will face in the current financial year? Also, do you think inflation is a major risk or is it just a temporary phenomenon?
A big risk is US interest rates rising too much amid a looming recession. If that happens, stock prices could take a significant knock. Other risks are prolonged continuation of the Russia-Ukraine war and prolonged mis-handling of the Covid situation by China. These two events would continue to put pressure on commodity prices and freight rates, affecting consumption demand and input costs of corporates. Speaking specifically of India, food prices and wages are not yet hurting us as much as they have done in Western countries. As such, the monsoon and crop output would be key data points to watch.
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Do you think, by any chance, that earnings will still grow in double digits in FY23 considering the inflationary risk and expected rate hikes?
A lot will depend on events like the Russia-Ukraine war and the China Covid situation. If both these mega events reach a conclusion, then earnings will have a chance to rebound. Assuming a prolonged continuation of these adverse conditions, double-digit earnings growth would be hard to achieve in aggregate. That said, there will be outliers who will deliver strong growth even in these uncertain times. Some banks, real estate companies, capital goods companies should do quite well in FY23.
What are the biggest themes you are betting on for coming years and why?
We like real estate and logistics, apart from healthcare. Real estate is emerging from a long down cycle, and is poised for the upward leg of the long cycle. The prolonged recession in real estate and aggressive regulatory actions like RERA (Real Estate (Regulation and Development) Act), GST (goods and services tax), etc., have caused a severe consolidation amongst home manufacturers.
Only a handful of home manufacturers are left standing, and the top brand name real estate players have access to bank funding as well as percentage completion money from homebuyers. As they are few in number relative to rising demand, they have pricing power. This bodes well for topline growth as well as profit margins.
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The logistics sector is poised to benefit from multiple growth drivers—GST implementation has enabled the growth of large-scale warehouses that can cater to multiple customers. Much improved road infrastructure and growth in private sector ports have increased the speed of logistics.
And most importantly, the emergence of ecommerce players has catalysed demand for quick and traceable delivery. Taken together, these factors are driving demand for multimodal, digitally savvy and multi-location logistics players. These players are aggressively taking away market share from unorganised truck operators, and also providing lots of extra services like warehousing, break-bulk, etc.
The costs of branch network, IT backbone and brand building are already incurred, and rising volumes will lead to rising margins. In relation to the enormous scope for market share gains, valuations of many logistics players are attractive.
Healthcare companies (hospitals and pathology labs) have pricing power and a lot of potential to take market share from unorganised players. The growth of the health insurance industry is an enabler for their growth. Valuations have risen, but longer-term growth prospects make them attractive long-term bets.
IT stocks were hit quite hard in the recent fall after Infosys’ earnings. What are your thoughts on the space?
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Valuations of mid-sized IT companies had become expensive, which are now moderating. Travel costs are rising, and so are wage costs. On the positive side, demand for digital enablement continues to be strong. All put together, we need to be selective while investing in IT services stocks.
We have taken exposure to IT product (software) companies, where we see greater scope for growth, cost control and expansion of valuation multiples. Fed (US Federal Reserve) rate hike should not directly impact IT companies, but an indirect effect could come if some of their clients face a slowdown due to rising cost of debt.
What is the basis behind your investment style, and have you changed the same over a period of time as we have been facing a lot of risks including Ukraine-Russia crisis, a spike in commodity prices and soon, the end of a low interest rate environment?
We use our proprietary QVG investment approach, which is a balanced combination of high quality but highly valued stocks (the ‘Q’), special situations, countercyclical and contrarian stocks (the ‘V’) and high growth but lesser valued stocks (the ‘G’). We have found that this approach keeps our portfolios well positioned regardless of economic and market conditions.
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Our superior long-term track record testifies to the efficacy of the QVG approach. Regarding the visible dangers to the stock market, we feel strong companies with ethical managements should be able to use tough times to further increase their market positions. As and when economic conditions normalise, these leading players would show good strong growth. As such, investors with a three-year investment outlook need not worry too much about the headwinds mentioned above.
What are your thoughts on new-age tech companies including Paytm, Zomato and CarTrade which have seen enormous selling pressure? Are you a buyer there?
New-age tech companies are adding to quality of life, reducing costs, reducing frictions and creating demand. As such, they have a major contribution to India’s growth and employment. However, valuations have not yet reached attractive levels. We are closely tracking performance and valuations, and will act when the time is ripe for investment.
Where do you see India compared to the world in terms of performance given the huge FDI (foreign direct investment) flow we have seen in last couple of years?
India is uniquely attractive among global markets. Wage costs are relatively attractive in India, and unlike the rest of the world, there is no real estate speculation amongst Indian savers. Corporate balance sheets are very light and strong at this time. Low-cost wages and strong balance sheets (both retail and corporate) are attractive initial conditions for sparking a multi-year growth cycle. When combined with troubles being faced in China, India becomes even more attractive.
A lot of groundwork has been laid for long-term growth through opening up sectors like mining and defence, and solving the logjam in the telecom industry. India’s merchandise exports are showing robust growth, indicating its globally competitive cost structure in certain industries. Regulations like GST, IBC (Insolvency and Bankruptcy Code) and RERA have created enabling conditions for growth and efficiency. With a globally competitive tax structure, India should continue to attract investments in the coming years.
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