For a flight to safety, bet on 3 sectors: Aishvarya Dadheech

We strongly believe that there are a couple of good midcap banks and NBFCs which would participate in growth from here onwards, says Aishvarya Dadheech, Director & Fund Manager, Ambit Asset Management

What are the big themes which you are looking for in the broader market?
The first thing I want to highlight here is that basically the time has passed. We are actually passing the pandemic. We are at the peak of the monetary stimulus. The fiscal stimulus is behind us. We strongly believe that we have to be very sure where investors should put their money.

So, the days of making easy money are over. From here onwards, it will be difficult to make money. One has to be very sure about which companies, which sectors to put the money in as that will create all the difference from here onwards. We believe investors should look out for a couple of trades. It has to be a flight to safety from here onwards. Investors would have to reassess whether the businesses that they are owning are benefiting out of the Covid situation. Secondly, they have to see if these businesses are scalable. Earning is very important from now onwards. So businesses that would grow higher in the earnings trajectory for the next couple of years will be the ones to make money for the investors.

Last but not the least, there is no point guessing how their balance sheets and financials will help them to become bigger over a period of time. It is time for investors to go back to the drawing room and chalk out a plan to see whether their portfolio is very strong and steady and if they are into quality names.

We believe there are a few sectors which are bound to grow much faster over the next couple of years and where investors can make a lot of money from here on. One of the sectors which we have been pretty upbeat about is chemicals. We strongly believe that chemicals will continue to see very strong growth from here onwards. Even on the global side there could be 5-6% growth, but on the India side, the volume and revenue could grow around 10-12%. There are many companies which can grow 20-25% PAT for the next couple of years.

Another one would be the IT sector. With the advent of digitisation, the kind of deal pipeline which is building in IT companies, has not been seen in the last decade. We believe that Covid has acted as a stimulus where the whole demand for the next five-six years has been bridged down over the next couple of years itself. So there is going to be huge traction and we have witnessed that.

In Q4 of last financial year and Q1 of this fiscal, most of the IT companies have reported very robust numbers and the deal pipelines are in a different league. Even most of the companies in the US have reported very strong numbers. We believe the traction in IT will continue.

The third sector would definitely be the consumer discretionaries. That is one sector which can be a dark horse. This is one place where we will see huge demand pickup once we are out of Covid, possibly in a couple of quarters and that will provide a big opportunity for higher earnings growth and good opportunity for investors to make money from here on.

Home improvement is a big theme cutting across across categories -- be it in cutleries, tiles and other allied products. What are your thoughts on the earnings trajectory of this category versus the valuations they are trading on?
The home improvement category has seen a big jump in demand in the last year or so. Look at the numbers of the leading players like Kajaria Ceramics or Cera Sanitaryware. These companies were growing at 5-6% volume growth over the last say five-six years and the trajectory has gone to altogether different levels where growth has been pulled up to 20% or so. The kind of commentary this kind of management are giving is of a different level altogether. There is very strong demand from tier two, tier three, tier four cities and even in some parts of the rural side because of very strong support for farm income over the last couple of years. We believe this demand will see a lot of traction and also the larger and the established player will also get benefit of the formalisation and consolidation which is happening in the industry today.

The weaker franchises are finding it very difficult to sustain. So, overall we believe that this sector will also get a boost because whenever there is a very strong equity rally, the spillover effect can be seen in the real estate sector. So within the home improvement segment-- paints, adhesives, tiles all are looking very exciting from here onwards. If we really look at the valuation, those stocks have moved up quite a lot over the last year or so but they are still justifying the valuations from a growth perspective. They were showing 15-18% earnings growth but that is going to go up to 25-30% for the next two years. These companies are still trading at close to 1 to 1.4 times depending on companies. We believe that the earnings trajectory will continue to remain at that level and that will justify those valuations.

What are your thoughts on the midcap financials?Are they a good bet at this level?
Midcap banks and NBFCs are at a very interesting juncture right now. In the last year or so, there has been much uncertainty in the system and following the consolidation, bigger banks have taken a lot of market share and the midcap banks and NBFCs have been putting their houses in order rather than focussing on growth. We strongly believe that there are a couple of good midcap banks and NBFCs which would participate in growth from here onwards.

We like the housing NBFCs. We have a very large allocation in housing players like Aavas Finance and CanFin Homes. So going ahead as housing is expected to pick up with the support of lower interest rates and the need for housing as the economy moves up, these midsized housing NBFC will really do well.

Coming back on the banks, we believe there are a couple of small banks which have a very strong capital position. Their provisioning is very conservative and they should be able to tide over these tough quarters. Interestingly, a couple of them are now trading at very attractive valuations and investors can definitely have a look at that.