India would start outperforming if not in this quarter, in subsequent quarter: Devang Mehta

“The data points – be it WPI or the data on industrial production – show we are doing relatively well. Plus, we are in the third quarter earnings season and will probably get into the prime in the next one week and then there is Budget. All these factors, in the next 20-25 days, would give the market that bit of impetus and we would start outperforming and if not in this quarter, in the subsequent quarter,” says Devang Mehta, Head of Equity Advisory, Centrum India

We have seen a stark underperformance in the Indian market versus rest of the globe since the start of this year. Even if one looks at the FPI flow picture, it is not just India which is losing out. China has also seen quite a bit of outflows. Even the US equity market has seen quite a bit of outflow and the inflows have been to countries like Brazil, Russia etc. Where do you see India this year? Do you expect the underperformance to be the texture for the rest of the year?
If you try and dissect the trends of 2022, what we saw for the entire year was that Indian markets were outperforming almost through the entire year compared to MSCI, the developed markets and other emerging markets. Our markets did relatively well. I see no reason why India would not start to do well. The first 10-12 days of the new calendar year has been difficult not only for Indian markets and also for FPI flows as you rightly talked about where India and China both were receiving money as such.

The biggest trend that has emerged in India over the last three, four years since demonetisation has been the power of Indian money or the so-called retail or HNI money flow which comes into the Indian markets. It cannot drive the markets to a larger extent but it provides a larger cushion to the markets in any eventuality.

A big force to reckon with is debt flows which also should be monitored. Yes, FII flows would resume somewhere in the next two, three months as a lot of events are lined up for the next one, one and a half month. Two, three things are evident; one, globally the inflation as well as the interest rates are somewhere near the peak, of course nobody can time it to perfection but they are somewhere close to their peak, India as well.

The data points to what we saw yesterday – be it WPI or the data on industrial production. We are also doing relatively well. Plus, we are in the third quarter earnings season and will probably get into the prime in the next one week and then there is Budget. All these factors, in the next 20-25 days, would give the market that bit of impetus and my sense is we would start outperforming and if not in this quarter, in the subsequent quarter the ascent of the Indian market can start.

What is the call on PVR and Inox now?
During the past couple of years, on Covid times, a lot of people thought that these stocks would now be written off, as OTT gains flavour. Most of the people would have thought that these stocks would not do well and these businesses would collapse. But a lot of great movies came out. A lot of south Indian movies are now established as mainstream movies and the content pipeline for the next six months is enough to make people go back to movie halls and enjoy their popcorns and the soft drinks.

My view is that revenge travel, revenge tourism, revenge movie watching has just started. In the next six months to one year, once people get out of the shells, these businesses would do well.

A couple of chemical names like Arcane Chemicals, Rallis India are seeing quite a bit of surge. Do you expect this to be a pre-budget move? If not this, could capital goods be the space that we should watch out for?
There are two spaces which we currently like and own a lot of these companies in the portfolio. One sector you rightly talked about is speciality chemicals and if I club even agrochemical which is, of course, different from it, these are two sectors which we encourage our clients to buy into and hold for a lot of our clients.

Be it China plus one, be it the economies of scale, be it how the business is shifting from being cyclical to structural for India, all these factors go into the favour of this sector. One needs to be a little more selective over there because certain chemicals would go through that cyclicality or raw material pressure as well, but we need to be selective over there.

One of the biggest impetus on the sector which will do very well will be capital goods plus ancillaries and proxy plays towards capital goods – be it bearings, be it pure capital goods, be it sectors related to energy or transmission All these are getting re-rated.

Some of these companies are seeing expansion in ROE and some are seeing huge order flows. Some of these companies are also seeing improvement in margins. The business environment for the next three-five years – be it capex, be it consumption related growth or be it credit growth – would mean there would be inflows towards capital goods as a sector. In the next three-four years, if somebody stays put over here, a lot of money can be made.

Within midcaps, would you highlight any bearing names?
We hold Timken for a lot of our clients in our portfolio with a disclaimer that I am not recommending the stock but some alpha ideas like Hitachi Energy, Honeywell Automation are in the automation universe/bearing/capital goods which help not only to improve productivity and efficiency but energy efficiency as well.

A Lot of these companies operate in sectors which are going to do very well and one cannot buy these sectors directly. So one needs to play the proxy or the ancillary play.