Why investors should focus on long-term structural stories rather than recovery plays

If you are not focusing on structural themes in this bull market, then you are missing the wood for the trees. In the last few years, India’s economic growth has had its fair share of ups and downs, but some industries have major tailwinds to move significantly ahead over the last few years and create wealth for shareholders.

Let me share a few examples of sectors that we have participated in over the last few years: CDMO (Contract Development Manufacturing Operations) / CRAMS (Contract Research Manufacturing Operations) / CRO (Clinical Research). Companies like Divi's Lab, Suven Pharma, Laurus Labs, Navin Flourine, PI Industries, and SRF have delivered highly profitable growth over the last 3-5 years.

The other interesting theme we invested in was IT ER&D services (IT embedded services) as the trend of ever increasing application of electronics & digitisation in automobiles led to a higher investment in such technologies. Even the adaptation of EVs and autonomous vehicles is leading to larger and longer projects for IT ER&D companies. The transformation of media delivery on OTT platforms has been a boon for companies in this space. The medical devices industry has also warmed up to adaptation of more and more digital applications -- another big growth driver for the industry. Companies like Tata Elxsi, LTTS and KPIT Technologies have benefited from higher workflow to each of these companies over the last few years.

The third interesting theme we participated in nearly a decade ago was the real estate rental yield play, particularly in the commercial real estate space. Over the last few years, large PE investors have invested billions of dollars in Indian commercial real estate as they were attracted to high rental yields of 8-9 per cent, a trend that we identified and accordingly participated in a Mumbai-based listed company – NESCO. Over the last ten years, the real estate index (largely dominated by housing real estate companies) has delivered virtually no returns or negative returns whereas NESCO has delivered a 15 per cent+ CAGR return over the last 10-12 years.

Looking ahead, we believe that there are quite a few structural changes that are playing out in the Indian economy with Covid as a catalyst for the Indian corporate sector:

• Cost efficiencies and balance sheet discipline across sectors or companies
• The organised sector gained market share as unorganised market remained saddled due to labour / capital challenges and could not keep up with the revival of supply
• Rural India has been at the forefront in revival of demand
• The impact of China+1 strategy on global supply chains
• Acceleration of digital adoption across value chains has been an additional catalyst
• An uptick in bank deposits (11 per cent v/s 8 per cent a couple of years ago)
• We, therefore, see a secular change of trajectory for Indian corporate earnings growth over the next few years.

(Sachin Shah, Fund Manager, Emkay Investment Managers Limited)