“We expect pickup in government-led spending and easing of liquidity, which will start aiding growth from next quarter onwards. Last 18 months to 24 months, we have seen a lot of stock run up and sectors run up in Indian markets,” says Satish Kothari, SageOne Investment Advisors.
In the last two months, we have seen a 3000 points correction in the benchmark and a recovery of nearly 1000 points from the lows. So, how are you positioning yourself amidst such volatility? What is your market view at current juncture if you could just take us through that?
Satish Kothari: The Indian markets have cooled off in the last two months primarily driven by Q2 FY25 earnings, which were quite weak and FIIs selling and rising geopolitical uncertainties. The broader outlook for near-term continues to be a bit uncertain, driven by external global environment and investors will watch out for how Q3 FY25 earnings pans out for corporate India. However, when we look at Indian macro environment, it continues to be strong and stable.We expect pickup in government-led spending and easing of liquidity, which will start aiding growth from next quarter onwards. Last 18 months to 24 months, we have seen a lot of stock run up and sectors run up in Indian markets.
From here on, our view is that market will favour stocks with high earnings and predictable earnings growth. So, we continue to prefer pockets where there is resilience and superior growth from our perspective.
Like you just highlighted and pinpointed that the first half of the earning season has been a dampener, but the market and as per you as well the second half earnings could be better and there are some of the factors like strong monsoon, festive, pickup in the government capex that are being pointed out right now. But which sectors could benefit the most? What is your view on this?
Satish Kothari: See, we remain bottoms up in terms of stock picking and do not necessarily take a sectoral call from a fund perspective. Our sectoral allocation is more of an outcome of the stocks we choose largely, but as an investment process of SageOne what we prefer is we prefer stocks with consistent and high earnings growth, in our case, which is around 16% to 18% over the next few years and are available at a fair to reasonable valuation.
Businesses and thereby sectors which fit in this criteria right now are certain sub-pockets of consumption, particularly in terms of organised value retailing, certain consumer discretionary space and food delivery, quick commerce.
We also like certain aspects or certain sub-sectors of financials as such, particularly non-lending financials in terms of insurance and capital market plays and are also bullish on select niche NBFCs as such. But overall, our sector view is we do not take sectoral call as such. We are more bottoms-up in terms of stock picking.
When you mention organised retail, where does your preference lie because organised retail is a very vast market because there is clothing, footwear, jewellery, retail, groceries, electronics. So, where does your preference lie here?
Satish Kothari: Yes, you are right, so retailing is a very difficult business and the market leader or the efficient guys make disproportionate share of profits. So, we own a value retailer, which is present across formats from clothing to groceries. We like the name as it continues to scale up profitably and is growing at a very-very fast pace despite broad-based consumer slowdown what we have witnessed.
As I said, that it is a very difficult business, we continue to like this name as we feel that this company can grow at a very high rate for the next few years driven by scale up in existing formats and they continue to try out new formats which gives optionality and thereby increasing its TAM. So, we are quite bullish on the name and we continue to like this name.
You just touched upon the quick commerce business. So, in that space, in the listed space specifically, there are just two listed players, Zomato as well as Swiggy. So, are you preferring the company that has already proven its mettle in the market or you are choosing the newer player which is available at a discount, some bit of a discount or both given that the market size is quite large and both players are expected to grow?
Satish Kothari: See, as you said that the overall opportunity size and runway of growth in this space is very-very high. As of now we prefer the name which has already proven its mettle. Your other point that the competition is increasing in this space and will go multi-fold given that players with deep pockets are entering into this space. So, our bet is on a company which has already proven its mettle and is very-very high on execution.
So, in retailing and a space like quick commerce you have to bet on someone who is very-very high on execution as such. However, given the opportunity size and runway of growth, more than one player can do well in this space. We will continue to observe if there is any opportunity in this space and other name as well. As of now we continue to bet on the name which is very-very high on execution.
Are not you worried about the competitive intensity in the quick commerce business because given that there has been the recent fundraise by the likes of Swiggy, Zomato as well as Zepto, so what is your sense on that?
Satish Kothari: As I said that we are closely observing the marketplace because everyone is raising money and our bet is on the guy who is executing it well, but we have to be cognizant of the fact that how this space is moving as such.
The opportunity size is huge. As of now we are just a $5 billion industry as of now and it can continue to grow at a very-very high.
So, competition will continue to increase, people will go on a land grab mode but we still feel that eventually it will be a maximum two- to three-player market as such and the market leader will make disproportionate share of the profit.
You have highest exposure when it comes to the BFSI sector, so where does your preference lie here? Is it with the private banks, PSU banks, insurance or capital market ancillaries?
Satish Kothari: See, as discussed, for our stock allocation, we have bottom-up approach, so sector allocation is more of an outcome than a process as such.
Having said that, a lot of value does reside in BFSI space as well. And even if you look at BFSI space as well, it is so vast and there are so many sub-sectors with different drivers of profitability and growth as such.
So, when you look at that aspect, there are certain aspects where we see there is growth and there is value as such.
So, on the non-lending space, we do like capital market plays and insurance guys as such. On the lender side as such, we like select few private sector banks and select niche NBFCs where we feel that the asset quality risk is on a lower side and the valuations are lower than the historical averages. So, we continue to like this space but again, it is more of a bottom-up rather than taking overall sectoral call.
