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00:00 I'm joined by Gautam Duggar, Head of Research at Motilal Oswal Institutional Equities.
00:06 Gautam, thank you so much for taking time out and joining us.
00:09 Thanks, thanks, Pallavi.
00:12 So, you know, you've spoken about quite a few sectors that you're bullish on,
00:17 you know, over the next few years. What are your picks and why so?
00:24 Yeah, hi. So, you know, if the outcome tomorrow is not too different from what the exit polls
00:31 are predicting, then we expect policy continuity, policy momentum and stability to maintain.
00:36 And things which have worked in the recent past, we expect them to continue to do well.
00:41 So PSU banks, you know, energy, power, capital goods, real estate, automobiles,
00:48 these are some of the sectors where we have a bias and an overweight in our model portfolio.
00:56 And we think that sectors like PSU banks and real estate, which are cyclicals,
01:03 and still have some, you know, especially in case of PSU banks, where the room for valuation upside
01:08 is still there, they can continue to do well, because now you have 5 more years of policy
01:13 visibility. And that augurs quite well for CapEx oriented sectors, manufacturing oriented sectors,
01:19 you know, something which we've already seen working quite well in the last 12-18 months.
01:24 We expect that continuity to also reflect in the wealth creation.
01:28 Got it, Gautam. Harsh also joining in. I want your quick take with regard to
01:35 energy, especially because you've spoken about that. We've seen how energy stocks have really
01:41 rallied over the last five years. In fact, one of the top sectoral gainers in Modi 2.0 era,
01:47 you expect that to continue into Modi 3.0. Talk us through the factors, of course,
01:53 possibly one of them just being the energy deficits that we've seen. But outside of that,
01:58 talk us through what those positives could be and how valuations therefore are looking
02:03 that's making you so bullish. So we like OMCs, within which HPCL is part
02:09 of our model portfolio. We think crude is in a nice range. Valuations are still cheap,
02:15 and there is a decent dividend yield. So that is one space. Second, we like ONGC2,
02:20 given the dividend yield and valuations. Gale has been part of our top 2024 ideas.
02:25 And also something which we like, given where the underlying businesses are, you know,
02:33 operating, you know, specifically petrochemicals, where we expect a turnaround,
02:37 transmission, where we expect a good 7% volume growth. We're expecting ROEs and free cash flows
02:42 to also improve for Gale. So that is one name which we've been very bullish about.
02:48 And then, of course, there are names like Coal India, which incidentally, again, is part of our
02:55 top 10 CY24 ideas list, which has done well. Results were good. We have seen earnings upgrade,
03:01 and dividend yield also remains pretty strong. So some of these PSU names belonging to energy
03:08 basket have been part of our preferred bucket list. And Gautam, if I can switch focus more
03:15 towards the railway side, but stick to possibly that theme, which has done well in Modi 2.0.
03:22 Within railways and aviation, you also seem to have a hint of flavor of IndiGo. You like
03:30 interglobe aviation. Now, aviation itself globally per se has never done well as a long term theme.
03:37 What makes you so bullish on Indian aviation? That's one. And second,
03:41 on railways, again, we've seen a very good rally, you still see value there.
03:45 So railways, I won't be able to comment because we don't track individual railway stocks. But as a
03:51 team, it might continue to do well and valuations while they look expensive, they can remain
03:57 expensive or get even more expensive before they get it. So very tough to take a call on near term
04:02 valuations for some of these teams which have already run up well. As far as aviation is
04:06 concerned, I think there is a clear consolidation to happen. You have IndiGo with a clear lead in
04:11 terms of market share, more than 60%. But I think power which has also come back a little bit,
04:15 given the number of people that we've seen traveling across the pre-COVID level,
04:22 the monthly data which comes out, and plus ATF prices being down,
04:26 the new CapEx which is happening, it does provide a good long term visibility. Yes,
04:31 I do agree with your point that globally not many aviation companies have made money.
04:35 But wherever they've made money, they've created tremendous wealth. And one of the important
04:39 aspect is the leadership position, whether you have a leadership position or not in that market.
04:45 If you do, then obviously you create a disproportionate competitive advantage for
04:49 yourself. And that is what we are seeing playing out in IndiGo. All right. Gautam, you have also
04:55 spoken about being positive on domestic manufacturing. We've of course seen the
05:00 government's thrust on manufacturing. GDP figures came in on Friday. Manufacturing
05:07 is performing fairly well. That's expected to be the case going forward, given government incentives.
05:13 How are you viewing the sector and any stock specific picks there? So, we like EMS companies.
05:20 We have coverage on EMS, Avlon, Data Patent Sign, some of those names. So clearly they seem to be
05:27 doing quite well. The results just got declared, the fourth quarter results, and they're doing
05:32 reasonably well. So that's a space we remain quite active on. And manufacturing encompasses many
05:39 things. There's no particular sector which you classify as manufacturing. There's manufacturing
05:45 inherent in many subsectors. And within that paradigm, we also like real estate. It's been
05:52 one of our most preferred sector for more than two years now. We see that the cycle can elongate
05:57 for a longer duration than what we are used to in the past. So we do have good real property,
06:04 show by normal portfolio. We still think that there's enough steam left there.
06:09 And in the same breath, if I may, I can also add things like hotels and some of the consumer
06:15 discretionary names, where the going has been really good. Some of the cyclicals like auto
06:21 or property or for that matter, even the other sectors that we just spoke about,
06:30 there, what has actually transpired is that the conventional duration of the cycle is changing.
06:38 For example, we are already in the third year of real estate cycle or third year of a hotel cycle.
06:43 In the past, we have seen that cycles get over by four or five years. Possibility of those duration
06:48 getting extended this time is pretty high. We must remember that HODL, for example, was in a down
06:54 cycle for almost a decade. And now we are just in the third year of the up cycle. I agree, stocks
06:59 have already done well, but clearly the demand supply gap in terms of the CAGR that they have,
07:04 the gap in that CAGR is pretty high still for some of this sector upturn to continue.
07:11 And thus our entire focus within our portfolio is more of the domestic cyclical side.
07:16 We are underway on defensives, whether it's consumer staples, limit, or even IT for that
07:22 matter, where we're still running an underway position. So portfolio stance is very clear.
07:27 And I think the continuation of this government, we will know by tomorrow, whether the exit polls
07:33 numbers are correct or not. But last two times, 2014, 2019, if you see, whatever eventual
07:40 performance came, it was slightly better than what exit polls predicted. So if that were to happen
07:45 tomorrow, you have a decent visibility and run up for growth and policy momentum to continue
07:53 for the next five years. And that obviously lifts the valuations of a lot of sectors,
07:58 because the near term big events are never about one year forward fees or one year valuations.
08:03 They're always about big themes and big sort of wealth creation.
08:07 Right, Gautam. Gautam, what's your sense with regard to the Nifty valuation overall at the
08:16 moment? We've seen a good rally in broader markets as well as now on the Nifty 50 itself.
08:22 Do you believe that it's going to be some bit of consolidation before we see an up move now?
08:28 Also, I want to try and squeeze in one more part of this question, where I want to try and get your
08:34 take on FIIs, because FIIs, yet not big buyers in India. Of course, some bit of buying we've seen.
08:42 What's your sense? Do you believe that they'll enter at this point and therefore,
08:49 there's more room for upside from here? I don't think one needs to look at markets in that
08:54 context, whether a particular set of buyers come in or go out, and whether that drives the market
09:00 up or down. I don't think that's a sustainable way of creating wealth in the long term. Look at the
09:06 last three year data, CY22, 23 and first four months of CY24. The total cumulative FII flows
09:13 are zero, and total domestic inflows are $72 billion. Despite zero FII flows, we have seen
09:21 enough returns in the market. Therefore, to obsess about a particular band of investors,
09:29 whether they will get in, what time they'll get in, and which stocks they'll buy, I think it
09:34 doesn't matter in the long term. Secondly, to answer your question on Nifty valuation,
09:38 they're trading at about 20 times right now, which is pretty much in line with the 10-year
09:43 average, 1-year forward pace. So valuations as well as Nifty's concern is quite reasonable in
09:48 my view. Yes, valuations are stretched in mid-cap indices, small-cap indices, but that's how it
09:53 always is. The market never trades at average valuation. It either trades at a premium or a
09:57 discount. So as far as large caps are concerned, clearly, there is more value there when you
10:03 compare them with the small and mid-cap indices. But even within large cap indices, there are some
10:08 sectors which are overpriced, and some sectors where there's enough value that exists.
10:12 So the indices are always an interplay between various sectors with expensive and relatively
10:18 more reasonable valuations. So I'm quite comfortable with Nifty valuations of now.
10:24 In fact, if our predicted EPS of 1140 and 1320 for FY25-26 doesn't see any cut in the next 6-9
10:31 months, then if the current valuations continue at 20 times, you have a reasonable chance of Nifty
10:37 trading around 26,000 one year down the line if we were to discount FY26 EPS by 20 times one year
10:43 later. Right. Gautam, we've spoken enough positives. In fact, we've spoken a lot of positives.
10:50 I want to try and throw you a question with regard to where you see caution. Where do you see the
10:57 possibility of downside more than upside here? Is there a specific pocket, space, sector, company?
11:05 What's your sense? Yeah, so clearly consumption remains very weak still in the economy.
11:10 Whether you listen to corporate commentaries or also to the GDP data which got released last week,
11:16 there is definitely an issue in the consumption side of the economy, where there is a problem
11:20 as far as growth and volume growth is concerned. Other element, obviously, some of the overrated
11:28 sectors, some of the spaces which are flying without cash flows, without concurrent earnings
11:33 growth, they will definitely come under pressure at some point of time. It's just that we don't
11:36 know when. So valuations, obviously, one has to keep a very keen eye on, especially in mid and
11:41 small cap. That's a big risk. And third, any upheaval globally, because this is a year full
11:46 of elections. We are done with ours, but there are more than 20 elections lined up. So that can,
11:52 obviously, create its own volatility and geopolitical situations. One has to be cognizant
11:58 of that. But remember that market never corrects on known risks. Any big correction has always
12:04 happened when unknown risks have transpired. So typically, known risks are getting, usually get
12:10 discounted quite fast. So when markets do correct, we will not know why it is correcting. Those risks
12:17 will unfold only then. Thank you so much for taking time for us, Gautam.