How does the current deal look over the next 12-15 months? Is it defense? Is it IT? Is it facility investment?
Sandeep Sarbharwal: Many capex-focused companies are focusing on capex. Things like L&T have been consolidating throughout the year. I believe we are well positioned to perform well over the next few years. Many companies went through a phase of poor execution, reduced pre-orders, etc. during the election period, which has now passed and will continue to do so. So the theme should work well. In the IT sector, some selective companies have performed well. There are also expectations that there will be some kind of revival next year. But we also hear about some kind of budget cuts or rationalization that the new American regime is talking about. So, you need to track how this impacts your overall sourcing requirements and economic growth in the United States. Consumer staples stocks have performed well selectively and will continue to perform well. Although not as many EMS themes have been purchased, many of these companies are continuing to expand their presence, acquire new customers, etc. So potentially they can continue to perform better.
Will 2025 be another solid year for Dixon, Amber or Kaynes?
Sandeep Sarbharwal: Yes. This may be because they are constantly adding new customers and PLI benefits help them retain customers. Otherwise, it’s a very low margin business. Historically I have not liked this business because the margins are so low and the only way they can make a profit is because of massive government incentives. However, they continue to gain new customers, and this is a sector that many investors cannot afford to ignore.
Infosys is at an all-time high and I wonder if I have missed any of the headlines in the last three months. If AI is becoming more and more mainstream, nothing has changed in the sector yet Infosys has hit an all-time high as the company is still struggling to deliver concrete double-digit growth, so what is the market expecting?
Sandeep Sarbharwal: Many of these tech stocks are tied to Nasdaq movements. So, if you actually correlate the movements of Indian IT stocks with Nasdaq, you see a very high correlation. It’s completely different. I think that was the driving force because as we got global tech money flowing in and we got into the election phase, people got defensive. So IT actually performed better because it had a lot of room to defend, as in a market correction. That’s the driving force, but you’re right that growth won’t return to double digits anytime soon. Or maybe we’ll go back to double digits, I don’t know. Therefore, the valuation at which the stock is currently trading is excessive compared to the growth it can deliver.
We have had a good monsoon and inflationary pressures have been moderate, but there has been no growth when it comes to very basic categories like soap, shampoo and toiletries.
Sandeep Sarbharwal: This is because consumer pockets are stressed and inflation in vegetables, food, commodities etc., coupled with overall incomes, has led to wage and salary growth lagging behind what we have seen, especially some of the price movements. Imports have led the way, and some of that has come from tariff increases and such, and taxation rates remain high. Consumer demand in India has been stagnant for over two years. It will eventually be revived, but the wait will be long.
What do people do in the meantime? You can either start accumulating these stocks or wait for your turn and buy them when your turn comes for a couple of quarters.
Sandeep Sarbharwal: I don’t think it makes sense to wait your turn for many of these stocks. So whenever these stocks go down, let’s say 30-35% from the top, you accumulate them and a lot of these stocks are close to that level. If we see a further 5%, 7%, 10% decline due to negative news, we have a good opportunity and can expect to profit from these companies when we buy them at appropriate valuations, with a potential two-year recovery cycle. . I think the 3-year CAGR of 15-18% is pretty good.
There are two more stocks that have performed very well and these belong to the PSU sector – PFC and REC. They go up together and they go down together because there is a connection in the business model and ownership. Where are these two stocks headed since they are A) PSUs, B) Power, and C) NBFCs that stand to benefit when interest rates fall?
Sandeep Sarbharwal: NBFCs tend to benefit more than banks from interest rate cut cycles and improved liquidity. So clearly NBFCs are in a much better position. The main issue with PFCs and RECs is that they are focused on one sector and that is solar. I think it looks good in the short term, but in the long term there will ultimately be a lot of stress on the solar side, given the rate at which capacity is growing. This is because many new solar investments are finding it very difficult to enter into PPAs. etc., many of which are funded by PFC and REC. This story takes place 2-3 years later. Many investors won’t look that long. In the near term, the PSU rebound could potentially continue. But if I had to buy NBFCs, I would buy more of the hard-hit private sector products like L&T Finance and Mahindra Finance. You may benefit because M&M’s indicate increased demand for tractors. All of these stocks are down nearly 30-40% from the highs seen at the beginning of the year.
