Dalal Street Voice: Manufacturing, consumption, banking and financial services themes looking attractive: Anand Shah of ICICI Prudential AMC

We are optimistic on the manufacturing theme. We have seen 10 to 15 years of difficult phases in manufacturing globally on account of large excess capacities in China, Anand Shah, Head - PMS and AIF Investments, ICICI Prudential AMC – said in an interview.

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Shah has more than two decades of rich fund management experience in the Asset Management industry, most recently as CEO of NJ Asset Management.

Edited excerpts:

Q) The market off late has been volatile, but over 20% rally already seen in Nifty50 – what is your view on market? What should be the investors’ investment strategy?

A) An investor, we believe, can have either good news or a good price. March 2020 was the time when circumstances were challenging but valuation wise the market was attractive.

Given the rapid pace of vaccination, the pandemic situation appears to be largely under control. As a result, the equity market has rallied on the back of impending recovery both in the economy as well as corporate earnings.

We believe the economic and earnings recovery is likely to keep aiding the market’s upward journey. At the same time, globally as well as domestically, we are at the beginning of the end of fiscal and monetary stimulus which have been unprecedented on account of the pandemic.

Going forward, higher interest rates and to some extent higher inflation could make the markets volatile. Going forward, for the upcoming 12 months and ahead, the key strategy would be to focus on businesses that have sustainable earnings growth.

Here we are looking at select pockets of the market in manufacturing, consumption, banking and financial services. The focus is more bottom-up than top-down with a view to increase the earnings growth rate of the portfolio.    

Q) FIIs sold heavily during October when Sensex, and Nifty50 were hovering near all-time highs. What seems to be worrying FIIs and is it a sign of caution which retail investors should take note off?

A) Data suggests that FIIs clearly are buying into Indian markets. On a year-to-date (YTD) basis, they have been net buyers to the tune of 67,119 crs (Data as on November 23, 2021).

FIIs have been investing in India as India has been one of the better-performing markets not only in the emerging market universe but among global markets as well. Also, we have many IPOs hitting the market.

In the past few IPOs, we saw higher levels of FII participation. So, it is likely that there could be a possible churn in their investment.  

Q) September quarter earnings was a mixed bag. What are your views on FY22 earnings expectations?

A) September quarter results were largely promising barring a few companies in B2C businesses which are facing the brunt of higher commodity prices.

Several companies from metals, mining, banking, and financial services had surpassed our expectations as well. Even the sales number in real estate and retail looked promising.

So, in terms of our portfolio companies, September quarter earnings were robust.

In the upcoming quarters, we believe the earnings trajectory will be robust but one will have to be mindful of businesses that will not be able to pass on the raw material cost to their consumers.

We have input inflation both in terms of mining and manufacturing but B2C businesses are not able to fully pass on that price hike to their consumers.      

Q) We have seen a strong rally in small & midcap space and now that the tide seems to be taking a cautious stance – do you think high beta stocks could come under pressure?

A) Over the last 12 months, the mid and smallcap space has seen a sharp rally, but on a 3-year CAGR basis, the returns have been reasonable at 21.6 per cent which is largely in line with the long-term average.

Similar is the case with the Nifty index and corporate earnings as well. While we are seeing robust earnings growth currently, since 2015 we have been going through a very challenging earnings cycle.

Banking earnings were under pressure from 2015-2018 on account of asset quality review. Similarly, the mid and small-cap companies have come through a tough patch owing to developments such as demonetisation, GST implementation, NBFC crisis, and pandemic.

Companies that have managed to survive these tough times are typically strong businesses and going forward they will be the beneficiary of the recovery cycle. So, the uptick in this space can be sustainable from a near to medium-term perspective.    

Q) International investment bank, UBS has already turned cautious on Indian markets after recent rally (FIIs are already pulling out money) – what are your views on that?

A) We believe that companies create wealth and not markets. We would rather focus on individual companies which can survive difficult times and thrive in good times.

To that extent, we remain optimistic and constructive as far as the economic and earnings growth rate of our portfolio companies is concerned.  

Q) Which sectors are likely to lead the next leg of the rally?

A) We are fairly optimistic about the manufacturing theme. We have seen 10 to 15 years of difficult phase in manufacturing globally on account of large excess capacities in China.

Since 2018, China is becoming increasingly non-competitive in manufacturing owing to a rise in labour costs, stringent pollution control measures, their goal towards decarbonising their metal production, etc.

This augurs well for manufacturing in general across the rest of the world as they benefit from lower dominance from China. This gives Indian manufacturers the opportunity to not only improve their profits but also gain global market share.  

Another sector we are constructive on is the banking sector, especially large corporate banks. As the economy recovers, banking, in general, is likely to be one of the top beneficiaries.

We believe there is potential in large corporate banks which are reasonably positioned in terms of net stressed loans, growth outlook, CASA, and resilient portfolio.

The Net Stressed Loans (Gross NPAs) are largely contained for large private banks. Over FY19 to FY21, certain private banks have registered double-digit loan growth, which is higher than the industry growth. At the same time, some of these banks have improved their market share as well.

Another sector we are closely looking at, is the transportation and logistics sector. As economic activity picks up, the companies engaged in the transportation of goods are likely to benefit.

Along with this, the direct freight corridors are expected to provide multiple triggers for companies engaged in this segment.  

Q) One of the PMS strategies that you manage is ICICI Prudential PMS Contra Strategy. The Strategy has been among the top performing diversified PMS strategies on a 1-year to 3-year basis. Given that in a bull market, most stocks have appreciated, are there still Contrarian opportunities available to exploit?

A) Many times good businesses also encounter short-term challenges and thus they become an opportunity for contrarian investing. If we believe that a company has been managed well in the past and has the capability of overcoming short-term stress, it is an opportunity one should aim to exploit.

If you observe the overweight sectors in our portfolios, they are in market segments that have delivered good earnings growth and at the same time are reasonably priced.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)