Arvind Kothari of Niveshaay
“2023 should be less challenging and less painful than what 2022 was,” said Arvind Kothari, Founder, Niveshaay, an investment advisory firm, in an interview to Moneycontrol.
India outperformed global markets while tackling supply chain disruptions, interest rate hikes, inflation, and at the same time seized opportunities to build a strong base in manufacturing and other sectors. India’s advantage is that it itself is a huge market.
With over 12 years of experience in equity research and investment advisory, Kothari is optimistic about capex, discretionary consumption, and green energy.
His idea is simple: invest in companies with the ability to scale up, which can generate good ROE (return on equity), and ROCE (return on capital employed) in the next 2-3 years.
Is it time to bet on electric mobility for multibagger returns in the coming years?
Electric mobility is definitely going to be big due to the cost-benefit calculus, and we are invested in this. Sustainability is an added advantage. But it’s important to determine how to pick stocks in this industry where technology is transitory and under development. As Buffett says, “There’s a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.”
A lot of new age companies have come up which provide varied products / solutions for electric vehicles (EV). When an industry is in flux, it is important to look out for firms who will survive in the long run.
In 1930s America, there were about 2,000 automobile manufacturers. Only three survived. Thus, picking the right companies at the right valuation is important for manifold returns. Here, our approach is peripheral play which attracts less competition, is less disruptive, is a niche market, and has huge headroom for growth.
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Do you expect earnings downgrades as well as a cut in the GDP growth forecast for 2023?
The World Bank, the IMF, the RBI, etc., have all reduced the GDP growth forecast. This is majorly due to the global landscape of rising inflation, monetary tightening, escalation of geo-political tensions, and fear of the resurgence of Covid.
Rising inflation will weigh on domestic demand, and interest rate hikes will push the cost of finance upwards.
With lower demand and high interest expense, earnings may drop somewhat. However, with crude and commodity prices correcting, EBITDA margins should improve. So again, what becomes important is the type of companies and sectors you’re betting on. We’ve built a portfolio of companies where we see strong earnings despite whatever is currently happening in the global scenario.
Do you think 2023 is going to be challenging for the equity markets?
India outperformed global markets while tackling supply chain disruptions, interest rate hikes, inflation, and at the same time seized opportunities to build a strong base in manufacturing and other sectors. India’s advantage is that it itself is a huge market.
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With the general elections in 2024, we believe that investment in infrastructure will pick up pace, and that’s been visible in companies’ order books too. Can’t say if India will continue to outperform as others have a low base, but we believe India will continue to exhibit strength. The Russia-Ukraine war and Covid have accelerated the move to renewable energy, making energy transition and sustainability an important play. Here too, India has the ability to play a meaningful role.
We closely track the trajectory of the US Federal Reserve’s (the Fed) interest rates, the Russia-Ukraine war, Europe’s energy crisis, as also Covid to see if there’s going to be an orderly slowdown or a steep one. 2023 should be less challenging and less painful than what 2022 was.
Do you think it’s time to bet on domestic themes instead of export-oriented ones?
We follow a hybrid approach at Niveshaay. In the past one year, we’ve churned a large part of our portfolio and moved from export-oriented themes towards domestic ones due to the slowdown in Europe and the UK (though the US has shown some resilience).
Exports of some engineering goods, steel, paper, etc., have increased on account of Covid, global supply chain disruptions, and the China-plus one strategy.
However, with a resurgent Indian capex cycle, credit growth, import substitution, and good value propositions in sectors like engineering goods, textiles, defence, and renewables, the Indian economy is poised for growth.
Hence, domestic as well as export-oriented companies in sectors where we have the ability to offer a good value proposition and gain market share make up our portfolios.
Which themes do you have on your radar in the coming years?
Manufacturing (capital goods, textiles, etc.,), infra, green energy, and consumption are some of the top sectors or themes on which we’ve built our portfolio. Our approach has helped us in these sectors.
For instance, our recent private investment in Waaree Energies helped us understand the solar industry space and appreciate the global competitiveness of Indian module manufacturers.
Along with our data backed research, interactions with manufacturers and visits to expos guided us about the demand scenario in this sector.
The idea is simple: invest in companies with the ability to scale, which can generate good ROE (return on equity) and ROCE (return on capital employed) in the next 2-3 years. Markets chase growth. Hence, identifying at an early stage is important to successfully surf the trend.
Do you expect any major announcement from the Finance Minister in the 2023 budget?
This is the last budget before the 2024 Lok Sabha elections. During the pandemic and in the last year, the Finance Minister did lay down a framework for the revival of capex, import substitution, and export competitiveness. It was all about boosting our strength, i.e., manufacturing.
We can already see a lot of action seen in railways, defence, and PSUs. We believe the upcoming budget will also be a growth-oriented one. But announcements related to taxes, duties or anything which can hinder growth might attract negative reactions at a time when India is showing resilience in the global market.
Will 2023 be a year for midcap and smallcaps over largecaps, or vice-versa?
Midcaps and smallcaps react quickly in case of any negative externalities. This was evident this year too. With global inflation peaking, decrease in freight costs, and fall in commodity prices, the margins of these companies, which took a hit this year, is expected to improve. Continued growth momentum along with margin recovery can create a positive sentiment about mid- and smallcaps. This is our core focus area at Niveshaay.
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