ETMarkets Fund Manager Talk: Digital transformation, metaverse among big growth bets for Omniscience Capital: Vikas Gupta

Digital transformation and metaverse are one of the strongest growth vectors emerging in India and offers good investment opportunities for investors, says smallcase manager Vikas V Gupta of Omniscience Capital.

Given the expected growth of 15-30% for the digital transformation in the medium-term, HCL Technologies is part of the Omni DX and Omni Metaverse India smallcases of the investment advisory firm, Gupta, who is the chief executive officer and chief investment strategist, told ETMarkets in an interview. Edited excerpts:

What is your perspective on the Indian market amidst the current global situation?
We are bullish on the global and Indian markets. We believe the high inflation rates in the US are behind us, meaning, inflation had peaked in the US in June. The US Fed is likely to continue raising rates for the next couple of meetings, albeit at a slower pace possibly. This is likely to be positive for investor sentiment in the US and, thus, drive FII flows to emerging markets like India.

On the domestic front, the RBI will be forced to raise rates to some extent to match the Fed rate hikes. However, RBI will aim to be benign so that it doesn’t hurt domestic growth, but is just able to target the potential INR depreciation due to the differential rate hikes.

It is likely that the RBI might initiate other policies which could enhance liquidity in the domestic market so that there is no dearth of capital for the government, private sector and consumers.

Can you name a few stocks that are among your big bets?
While we identify stocks on a bottom-up basis, we focus on growth vectors which are likely to have long-term, secular growth driven by social, technological, legal, economical, environmental or political factors.

Digital transformation is one of the strongest growth vectors with global implications of transforming the way we live. One of our picks for this growth vector is HCL Technologies.

The expected growth for the digital transformation segment of its business in the mid-term is 15-30%. Given the growth rates, margins and high return on capital, the valuations are quite attractive.

Another related growth vector is the metaverse, which is likely to grow to $10 trillion from the current $60-80 billion. HCL Tech is part of our Omni DX and Omni Metaverse India smallcases.

Bharat Defence is another strong growth vector that we have identified. This is driven, primarily, by the large investments in defence preparedness required by the Indian Armed Forces.

One of our picks is Cochin Shipyard, one of the handful of companies in the world which can manufacture an Aircraft Carrier. With high return on operating equity (cash adjusted) of 27% and high cash on the books of nearly 33% of the market capitalisation, it is available at attractive valuations. It is part of our Omni Bharat Defence smallcase.

Besides this, are you looking at any other emerging themes?
Two other growth vectors we have identified are capital enablers and fintech, digital payments and banking.

Axis Bank is one of our picks which is part of both the omni capital enablers and omni fintech, digital payments and banking smallcases.

Axis Bank has emerged with a clean balance sheet and, thus, the future earnings margins and RoE (return on equity) are expected to increase. With a large discount to its intrinsic value, and expected earnings growth faster than revenue growth, it offers us a good investment opportunity.

The next growth vector is what we call the Bullet Train. One of the top picks which is part of our Omni Bullet Train smallcase is Rail Vikas Nigam Ltd. It is available at a P/E of 6 with a large order book, providing growth visibility. It sports a dividend yield of 5%.

One company which is part of several of our growth vectors and, thus, several smallcases is L&T. It is primarily an infrastructure company and thus gains from the huge government push for infrastructure development over the next several years. In addition, it holds stake in 3 IT companies which are exposed to the digital transformation growth vector.

As a supplier to railways, it is part of the Omni Bullet Train smallcase.

As a defence supplier, it is also part of the Omni Bharat Defence smallcase universe.

What are the key levers for India to sustain the current premium it commands over peers?
India is likely to remain the fastest growing major economy for several years.

The domestic economic growth driven by government-led infrastructure investments, private sector growth capital expenditures, and consumption is likely to lead to higher revenues and earnings for the listed firms.

With a growing economy, high-growth listed firms, and reasonable valuations, India is likely to be high on the list of emerging market investors.

Hardly any peer country is likely to grow at a similar pace and have similar long-term prospects.

According to you, what could be the biggest downside risk for Indian equities over the next one year?
Downside is possible most likely due to global factors rather than local. For example, INR continuing to depreciate at a faster pace or crude oil prices rising significantly.

The domestic situation is so strong that it can even withstand a black-swan like event, for example, a war on either the eastern or western fronts.

Where do you see Nifty and Sensex by the next Diwali?
Despite the above mentioned risks, a true black swan which is unknown and unknowable can have a downside impact on any market.

Barring a Black Swan, the Sensex and Nifty 50 have a high probability of being 10% to 20% higher by the next Diwali.

Based on this, Sensex is likely to be closer to 70000 and Nifty 50 closer to 21000.

However, these are “expected numbers”, i.e. statistical averages of the range of outcomes which are possible.

In some scenarios, it could be much lower, and in certain other scenarios, it could be much higher.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)