Expect 2023 to be a stable year with a lot of bottom-up opportunities: Rajesh Kothari

“The China-plus-one, Europe-plus-one themes are primarily true for two important sectors – specialty chemicals and capital goods and ancillaries related to capital goods. From the capital goods perspective, many of our portfolio companies have already announced new capex, particularly to cater to their global parent companies,” says Rajesh Kothari, CIO, AlfAccurate Advisors

What is your view for 2023? Are we in for a year of good returns or flat returns because brokerages, whether it is Credit Suisse or Citi or Goldman Sachs of JP Morgan, are making a case for no returns for Nifty this year?
If you look at 2022 versus 2023, there are going to be big differences. In 2022, the world was upside down and whatever worst you can think of, everything has happened in terms of geopolitics, inflation, interest rates and supply chain pressure. Think of any bad news and it happened in 2022. From that perspective, 2023 is going to be much better compared to 2022.

I think the worst of inflation is behind us, the worst of the interest rate cycle is behind us, the worst of supply chain pressure is behind us. Hopefully, Russia-Ukraine war is also entering into a stalemate kind of a situation and so nothing worse probably from here even on the geopolitical side. The macros are reasonably neutral to positive and markets are always a little bit ahead of time.

The last leg of the Fed rate hike may continue till March. But otherwise, markets are normally ahead of the curve so I am not too worried on the macro front. India has been reasonably resilient in the last 12 months which was an acid test for the country – be it FPI inflows versus domestic inflows, be it US inflation versus Indian inflation or be it US interest rates versus rates in India.

2022 was an overall good year. We expect a good stable year and from here, a lot of bottom up opportunities will come up in India across various sectors. If you look at the second quarter of FY23, it is proving that data point. I think there are many bottom up opportunities from here on. It is just the beginning of the growth cycle and so another two, three quarters of consolidation is possible from the economic data perspective and the growth will start accelerating and we will move from second gear to third gear hopefully.

Is there merit in buying metals, it is difficult to take a call but if China opens, if things change on that front, metals could make a roaring comeback because some of the metal companies now they have got excellent balance sheets, no debt, manageable cash flow and from the 2021 experience we know that when the cycle turns, they can hit a jackpot?
I think the best way to play that jackpot is to play through capex. So the more money metal companies make, the more debt-free balance sheets they have and it makes them a lendable kind of player which is the best thing to happen for the country.

We do not invest into metals because of too much uncertainty not only on the global supply chains but also because of the global tariff policy and we have seen in the last 12-18 months what kind of a different headlines result into either 10% up or down movements for most of the metal stocks. So we are cautious and therefore we do not buy into metals.

The other way to look at it is as you rightly said, many of these companies have become debt free and therefore the new capex revival has started even from the metals sector and therefore it is probably better to play it through the capex cycle rather than play it through the metals.

One of the themes that you have been betting on has been the chemical space. With this entire China plus one, Europe plus one really working out, which are the top companies that you think would benefit?
The China-plus-one, Europe-plus-one themes are primarily true for two important sectors – specialty chemicals and capital goods and ancillaries related to capital goods. From the capital goods perspective, many of our portfolio companies have already announced new capex, particularly to cater to their global parent companies.

For example, if you look at companies like Schaeffler, (a disclaimer, the companies which we are talking about might be holding for our PMS clients) has already announced a capex of Rs 1,000 crore to shift its line from Germany to India. Similarly, about two weeks back, Timken announced fresh capex of Rs 600 crore. Again that is primarily for the export market.

Schneider also announced capex to increase capacity by almost two-and-a-half times at its West Bengal plant. I think that many of these companies are coming out with best performance in earnings as well as the stock market. That is reasonably satisfactory from our perspective.

In specialty chemicals, we need to be really bottom up. In specialty chemicals, we like fluorine chemistry and right now we are having the companies in that basket. One needs to be very stock specific when it comes to specialty chemical space. In this space, the opportunity is huge and I keep saying that what India has done in pharmaceuticals, it can do the same thing in specialty chemical space as well.

We are seeing the increasing traction across the companies within specialty chemicals which are getting more inquiries from their customers; they are doing the huge capex for next two, three, four years; they are introducing the new products. We are reasonably confident on China-plus- one as well as Europe-plus-one themes. Both are working better than what we expected in the last two, three, four quarters.

Pharma and chemical are good comparisons because while five years ago the pharma story was great, today saying what Indian pharma has achieved globally is actually disappointing. Lupin margins are down, Dr Reddy’s has struggled, Sun Pharma has problems. If chemicals go the pharma way, then we have a problem.
No, think of Indian pharma 20 years back. What was Indian pharma exports share in total world’s export? Today Indian pharma has become the medical store for the world, just like IT companies the global offices become India’s office.

Similarly, India has done huge work on the pharma side for global players. Do not look at the margin. Look at the market share. What happened on margin is because of the other issues which have less to do with their presence in the US and more to do with the generic pricing because ultimately the pricing has not worked because the generic competition has increased.

Specialty chemicals is a different ball game. Here it is not like a generic pricing kind of thing. What I am saying is from the domain’s perspective. Just like how pharma, specialty chemicals have a similar scope and potential.

If you look at the capex of top 10 players in the Indian specialty chemical industry, their capex for the next two years is equivalent to almost the last five to eight years. So there’s a huge visibility for the growth ahead and we have a long way to go.