Is it time to buy global cyclicals, banks and consumer stocks? Amit Gupta answers

“Money is looking into the value pockets and that is very clear. The very high PE stocks have gone into a consolidation time correction, you are not making returns over there but definitely you are making returns into those stocks which are direct beneficiaries of government expenditure and direct beneficiary of private capex which is now coming up. It is clearly seen in metal, cement and chemicals and is the direct beneficiary of revival in housing which is not firing from all cylinders,” says Amit Gupta, VP & Fund Manager, ICICI Securities PMS

What do you make of this recent consolidation that we have seen in the Indian market? Despite global news flow, there has really been no major reaction?
The consolidation is there, we have also seen a profit-booking of more than 1,000 points actually and that has been the nature of the market. We have seen markets making new highs and then again falling into that zone of 2,000 points or 1,000 points and that is where it creates an opportunity also in the Indian markets.

The dollar is topping out and that is very clear. If the dollar is topping out, we will see the FII flows coming into the emerging markets. It is looking at the value pockets right now. For example, look at the Chinese or Hang Seng markets, they moved up by more than 50% because there was a lot of value over there and they were quite cheap.

Indian markets related to emerging markets were expensively valued but that story is still not there because we have seen the correction of almost 25% in valuations over the emerging markets when I look at the Indian markets right now. We were 85 times premium, now we are close to 63 times premium because the Chinese market has moved up. This is where the attractiveness of the Indian market starts coming back.

The five-year average price to earnings of our markets is somewhere close to 18.5 and when we were somewhere close to 17,500-17,700, we were at a five-year average price to earnings. We are not too far from there and if somebody is investing at a five-year average, my sense is in the coming one or two years’ perspective, the returns can be much better.

In terms of how things are moving as far as India premium versus rest of the world is concerned, do you think that also is correcting and will go back to the previous historic levels or will it still remain elevated versus the average?
It will remain little elevated because the kind of growth we are going to show now, it is going to be much higher. The inflation scenario of India actually is lower than the global average inflation consistently and the money flow into the Indian markets are at attractive valuations. It will be much faster and higher.

If you look at the FDI flows, two things are very important. Generally, we miss out in all the macro headwinds. One is the political stability in the Indian markets though we are heading for elections but that is something which has attracted a lot of FDI flows in the Indian markets in the last four-five years and that has continued.

Another thing is the law and order situation when there is political stability and there is a better law and order. You have seen what is happening in Uttar Pradesh. They have been able to invite some of the global investors into that particular state and this is something that we need to look at. State-wise, if FDI flows are increasing in more sectors, then our forex reserves will be much better and the stability of the currency again will come back. This all is going to benefit India when you compare with the developed or the emerging markets right now.

How would you look at which sectors to buy now? On one hand, we have a global slowdown and on the other hand, we have domestics, probably consumption not really picking up. How would you play this? Would you look at global cyclicals, banks and consumer stocks?
It is a very interesting question because the money is looking into the value pockets and that is very clear. The very high PE stocks have gone into a consolidation time correction, you are not making returns over there but definitely you are making returns into those stocks which are direct beneficiaries of government expenditure and direct beneficiary of private capex which is now coming up. It is clearly seen in metal, cement and chemicals and is the direct beneficiary of revival in housing which is not firing from all cylinders.

Some affordable housing and then some luxury segments were coming up. It is a little slower move and I believe that is where you need to identify your bets. I can give you one example. Generally, we look at the original equipment manufacturers. For example, in the cement space, very high capex is going on. They are doubling the capacity in ACC and Ambuja from 70 to 140 million tonnes, UltraTech Cement from 113 million tonnes to 160 million tonnes.

When they are going with such a high capex, the question is whether we can make money here because the supply side is growing by almost 13%-14% but the demand because of the little lower real estate market, is not at full pace. The demand is around 9% because infra is doing good, 50% cement goes in infra and 50% goes in real estate and the demand overall is around 9% so there is a mismatch between demand and supply.

If you are not making money in the OEMs and are more into the consolidating phase, how can you make money? You need to go one step back, look at the B2B companies which are providing materials to all of these suppliers. All of these cement manufacturers and that is where you can make money. For example, AIA Engineering is one stock we have been tracking.