Bullish on the capex theme? Varun Lohchab on 9 picks across sectors

A very interesting commentary came from the RBI yesterday. It said that RBI would be okay with some amount of inflation but the priority would be to maintain growth. One part of the market is really liking that approach of the RBI prioritising growth over inflation monitoring, because it appears that it is not a very huge issue in India.

You are correct. India is slightly differently positioned right now compared to some of the other developed markets where the level of inflation has been unprecedented. However, if one looks at India structurally over the last five to six years, inflation level has come down. Indian public is quite used to inflation levels in the 5-7% range. We are right now slightly higher than that range but over the next 12 months we should be coming back to the range.

So inflation in India is less of a worry and therefore I think RBI has been prioritising growth over inflation over quite some time. However, obviously they have to raise rates to a certain level. We believe repo rate increases will continue in India. So normalisation will continue but it is not going to be like the developed world where interest rates are going from 1% to 4%. Here, home loan rates which had come down to 6.5%, will go to 8.5%. A 200 bps rise on that base is still manageable.


How do you see the valuations of the , universe right now? There are regular back to back festivals in parts of India and the likelihood is that volumes would come back. Some price hikes have been taken. How do the FMCG valuations appear to you?

FMCG valuations are looking okay in the relative context of the markets and where some of the other sectors are trading. Obviously, the sector has not done much in the last two years barring

, which has given very good returns. The rest of the stocks have seen mild valuation derating, given that earnings continue to grow in high single digit.

So valuations are at a reasonable level. Now it is a question of when does the growth returns? FMCG is not very sensitive to the festive season. Some of the consumer discretionary sectors like apparel or paints and jewellery are more sensitive to festive sentiment and overall demand but FMCG is more of a through-the-year kind of buying.
Rural demand remains a tad muted; at least for the July to September quarter, we will not see any volume uptick for the FMCG names. However, the expectation is that by the second half onwards, things should start to look better. Obviously the base is getting a bit more favourable and even on margins, we will start seeing things getting a tad better.

Incrementally things are expected to get a little better, valuations are also in a reasonable zone I would say so risk reward on FMCG is not looking particularly negative now. It is more balanced.

The other end of the consumer space is the QSR type of consumption. , Westlife, Burger King and even restaurants are in that space, as is . How are the valuations? Is there curiosity from the institutional side about these stocks?
Just to put a caveat, we do not cover quite a number of these stocks. We only have

. However, if you look at the broader QSR space – institutional investor interest is fairly high. They are seeing it as a multi-year consumption story. It is one of the few sectors in consumption where penetration levels are still fairly low for organised QSR chains.

They are expected to roll out stores at a fairly fast pace in almost all of the formats. Domino’s, McDonald’s, KFC and Pizza Hut, all have fairly aggressive expansion plans and that is keeping institutional investors’ interest fairly high. Valuations have always been high in this space and will in my view remain so, till the time they are in a high growth phase.

It is a well liked space and both growth trajectory as well as the runway for growth look fairly long. Valuations are high and so one has to be slightly more selective and the time horizon needs to be slightly longer if one is buying them at current valuations.


What about the banking space? What kind of banks would you play now if one has to play the revival of corporate capex and inquiries as well, not just retail demand?

We have been fairly positive on two parts of the market – one is financial, second is industrials. These are two segments where we are overweight and even within financials, it is clearly your corporate lenders which we are more positive on. Names like ICICI, SBI, Axis are major parts of our model portfolio within financials.

We recently wrote a very detailed report on capex revival and why we believe it is looking quite sustainable and how private sector capex is looking to pick up meaningfully in the next three years. It is supported by cash flows of corporate India being fairly strong as well as the deleveraged balance sheets.

Compared to the 2010 to 2012-13 capex era, when it was not backed by cash flows, this time around private sector balance sheets are very strong and we expect this capex revival in private sector to continue for next three to four years which will provide a further fillip to the credit growth in the economy. So far, you are right. The last several years has been largely retail-led credit growth but we expect the corporate credit growth to pick up. Anyway with higher inflation levels working, capital requirements are also going up. We are fairly positive on lenders as rising interest rates would be positive for their NIMs, at least in the initial part of the rate cycle. Financials is definitely a good space.


What are your top picks in this capex sector revival theme or industrials?

One way to play capex is via financials. I already talked about ICICI, SBI and Axis. As far as the industrials infrastructure sector goes, we have L&T and Cummins.

In real estate, Phoenix Real Estate is our top pick. We have Aether within the chemical space because chemical is one of the sectors which is going to see strong capex.

Cement is another sector which is going to see strong capex. UltraTech and Dalmia are the top two picks we have. So it is across a whole host of sectors. There are certain building material companies as well which we prefer, which are more a play on retail but we are fairly positive on housing and capex revival in the economy as a theme. These are the two themes which we believe are multi-year and will be here for the next three to four years.