According to Goel, the chemicals industry is also a sector that is on the up again after almost two years of sharp price corrections. These are some of the areas in which Mirae is investing additional money.
What do you think about this complete turnaround not only in Indian but also global markets from Monday’s levels? Have you made any changes in your portfolio allocation or at least do you recommend doing so?Varun Goel: If we look at the broader markets, there is no denying that the markets are trading 8-10% higher than the historical averages. If you look at Nifty earnings for FY24, we are around Rs 1,000. We are looking at 10-12% growth for FY25 and FY26. So if you take Rs 1,250 as Nifty earnings for FY26, we are trading at almost 19-19.5 times the one-year forward earnings, which is 8-10% higher than the historical 10-year averages of around 17-18 times.
So overall, the markets are a bit expensive and hence we continue to favour sectors where earnings growth is more assured, be it banking, pharma or IT. We have not changed much in the portfolio, although we are observing the volatility in the last week or so. We continue to invest in stocks where we expect good earnings growth over the next two to three years.
But where do you put the extra money? What areas, what segments still look OK on a risk-reward basis when we look at companies like ABB and Trent and so on, whose earnings have been strong but are not low by any measure?
Varun Goel: Parts of the market are quite expensive. If you look at the entire industrial and capital goods sector, you can see that some companies have undergone massive re-ratings in recent years. In the short to medium term, we would be cautious on sectors such as defense and rail. So while defense continues to be a long-term investment opportunity, entry valuations can come down significantly in the future.
Overall, we see a healthy earnings growth trajectory in the pharma space. Both the domestic formulations and the crams and API opportunities continue to perform well. The US market is seeing better pricing, so we remain optimistic on that. In the IT space too, after the volatility of the last year, we believe that the BFSI space in North America should perform better and we should gradually see a recovery in both top-line and EBITDA margins.
We also believe that the chemicals sector is on the mend after almost two years of strong price corrections and we are convinced that the situation can improve at the moment both in terms of volumes and prices. So these are some of the areas where we are investing additional money.
Let’s talk about some of the ancillary exchanges, exchanges etc. Many of these ancillary exchanges like MCX, BSE etc have a lot of tailwind. What is the best way to leverage that? Through exchanges like KFin, CDSL etc or some of the AMCs?
Varun Goel: I think the financialisation of savings will be a medium to long-term theme. There is no doubt that there is a lot of profit growth possible in this area, whether it is in the stock exchanges, in custodian banks or in asset management companies. As more and more people invest in equity markets, some of these intermediaries as well as market participants will continue to do more business. That is a medium to long-term trend. We believe that profit growth in this area can outperform that of the overall economy and the broader market and so we are positive on this area.Is there a structural shift in consumption? Lemon Tree has fallen almost 17% because it reported weak numbers. On the other hand, companies like Dabur, Marico etc, the rural-focused companies or even GCPL are doing much better. Would you do some sector restructuring and move from urban to rural?
Varun Goel: In general, structural growth rates for companies in the consumer goods sector are in the high single digits. However, in some categories of daily needs, such as consumer durables, alcoholic beverages, hospitality or entertainment, the growth rate may be structurally higher over the next three to five years.
I would prefer to invest in some of those sectors and themes where you can get 12%, 15% or 17% earnings growth. In staples, that kind of earnings growth will be difficult to achieve despite a slight rural recovery, so I would prefer the non-essential stocks.
