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“India is on a very strong domestic growth path, which is only likely to grow stronger with decreasing global macro uncertainty and the resilient US economy, which has a 50-year-low 3.5 percent unemployment rate and a strong consumer spending outlook for the festive season (Christmas season in the US),” Dr Vikas V Gupta of OmniScience Capital told Moneycontrol in an interview.
He feels it is highly unlikely that technology stocks would go to the lows of 2022.
“Technology companies have strong order books and order pipelines. The client companies in the US are likely to spend even during a possible recession in 2023 on strategic, multi-year projects on cloud migration and digital transformation,” said the CEO & Chief Investment Strategist, who founded OmniScience Capital to provide a scientific approach to equity investments in global and Indian stock markets.
Also Read: This smallcase manager is more bullish on mid-caps and small-caps than bluechips
In the defence space, Gupta, who has nearly 20 years’ experience in capital markets, says that with order books ranging from 2-6 years, clean, cash-rich balance sheets, high return on capital, and expected growth rate in double digits, the free cash flow to enterprise value yield of 4+ percent looks better than the market benchmarks.
Edited excerpts from an exclusive interview with Moneycontrol follow:
Is it possible for India to record strong growth in the current and coming year given the global scenario?
Not only is strong growth possible for India, it is very likely, barring extreme black swan events, which by definition are not predictable. Everything known points towards a double-digit nominal growth rate for the Indian economy and for corporate revenues and earnings. The global scenario has significantly improved from a couple of months back.
There were two major risks before the global economy: inflation risks and geo-political risks. On a broad basis the two risks were mostly independent, but there was an impact of the Russia-Ukraine war on crude oil, commodities and food supplies, and consequent inflation.
The popular view was, and still is, that the inflation in global, US and developed markets was a result of loose monetary policies and Covid-related “money printing”. Our view has consistently been that inflation in the US was basically a supply chain issue. If the supply chains were disrupted from the source, i.e., ports in China or manufacturing units in other Asian countries like Vietnam due to Covid restrictions, then no amount of raising interest rates could help bring inflation down in an economically and socially appropriate manner.
What interest rate hikes could do is to reduce demand by killing the economy, thus bringing supply-demand in line and bringing inflation down. With supply chains improving, the last four months of data in the US shows a consistently decreasing inflation trend. The US recession, if any, is most likely behind us and the interest rate outlook is continuously becoming more benign.
The second issue of a geo-strategic risk of war is also getting more and more mitigated. With winter coming, both Russia and Ukraine are likely to go to a low-intensity war, more akin to a hostile, simmering, ceasefire.
With large gas supplies and lower gas prices, the risk of a sustained European recession are also receding.
The spectre of a much-speculated China-Taiwan war is also receding and looks unlikely in the near term.
In short, the major global factors causing uncertainty are largely behind us, barring the unlikely event of the US Fed surprising by being too hawkish in its December meeting.
India is anyway on a very strong domestic growth path, which is likely to grow stronger with decreasing global macroeconomic uncertainty and the resilient US economy, which has a 50-year-low 3.5 percent unemployment rate and a strong consumer spending outlook for its festive season.
Which are the themes that you want to invest in?
Our deep dive into the markets over the last couple of years, and in the last six months, has revealed a number of promising growth vectors that are still mostly in Mr Market’s blind spot. First and foremost is the Railways infrastructure sector — the Bullet Train, Metro rail and other railway modernisation plans, which are laid out in the National Rail Plan 2030, and supported by the National Infrastructure Pipeline budget of approximately Rs 10-15 lakh crore.
Besides the high-speed Bullet Train projects, it includes more than 30 Metro projects, several semi-high-speed projects, including the Tejas and Vande Bharat trains, and numerous electrification and double-lining projects.
Dedicated Freight Corridors are a major part of the plan, which targets capturing 45 percent market share of freight by the railways by 2030. This is supported by the PM Gati Shakti and National Logistics Mission related to the Amrit Kaal vision.
Bharat Defence is another major growth vector getting impetus from the target of Rs 1.75 lakh crore domestic production by 2025 and exports of $5 billion. Things are already moving at a fast pace towards the targets.
The Power sector is the third growth vector that will electrify the Indian economy and power it to double-digit growth rates over the decade. The financing of all this brings us logically to our next growth vector, Capital Enablers, which focuses on companies that provide the financing as well as the enabling capital markets infrastructure.
A related growth vector is FinTech, Digital Payments and Banking, where India’s UPI and RuPay are already world leaders in terms of transaction volumes.
Another growth vector is the Future of Mobility in India, which includes mass transport, as well as CleanTech and Electric Vehicles. All of these have huge resonance with growth vectors triggered by the Bharat Amrit Kaal vision and budget.
Finally, this brings us to the global vectors of Digital Transformation, Metaverse and AI Tech. These are transforming the global economy across sectors, but one of the main winners is Indian IT services companies, which are making it happen across the world in partnership with US Cloud and Technology platforms.
Do you think the defence space is overvalued or will the rally continue given the ongoing geopolitical tensions?
Many defence companies are cash rich. The RoE (return on equity) of our Defence portfolio is 15 percent. This, again, is likely to improve significantly when adjusted for non-operating assets like cash and investments.
For companies with order books ranging from 2-6 years, clean, cash-rich balance sheets, high return on capital, and expected growth rate in double digits, the Free Cash Flow to Enterprise Value Yield of 4+ percent looks better than the market benchmarks.
Is there any possibility of IT stocks revisiting their lows of 2022 in 2023, considering the slowdown fears in western nations?
It looks highly unlikely that IT stocks will go lower. These companies have strong order books and order pipelines. Their client companies in the US are likely to spend even during a possible recession in 2023 on strategic, multi-year projects on Cloud migration and Digital Transformation.
Now, with inflation receding and interest rate hikes (likely) peaking sometime in H1 2023, the chances of a US recession are quite low. Client spending is likely to accelerate further. The revenue growth rate of these companies is expected to be in mid-double-digits and accelerating as their digital revenue contribution increases as a percentage of total company revenue.
Do you think the consistent uncertainty over geopolitical issues can keep the equity market volatile over the rest of the financial year?
Again, we think global geo-strategic uncertainties are mostly behind us. The Russia-Ukraine war is not going to get completely resolved but is stabilising into some kind of a de facto hostile ceasefire situation, at least, during the winter.
The US-China cold war is likely to continue but cannot escalate into a full-scale war. Even a Taiwan attack risk has receded. There is no known event that will keep markets volatile. Rather, all data and facts point to an optimistic situation for the markets.
The PSU banking space has run up a lot in the recent past. What are your preferred bets among PSU banks and private banks?
We think it (State Bank of India) is one of the most dominant PSU Banks since it is still significantly undervalued based on the value of its numerous businesses. Further, the surprisingly strong digital banking efforts of this bank give it a huge growth runway beyond traditional banking. We also like the top three private banks (HDFC Bank, ICICI Bank, and Axis Bank). Of course, none of this is a recommendation to buy, sell or hold or should be construed as investment advice; and yes, we or our clients might be buying, selling or holding these.
But when you’re getting some of the most important banks, which are also the most entrenched in the economy on both the consumer and corporate side, have strong digital banking and fintech initiatives, and available at a large discount to their intrinsic value, it makes ample sense to look at the top and the best.
Also, keep in mind that their balance sheets are clean, and with the major provisioning behind, the RoEs have started to improve. Thus, earnings growth is likely to grow faster than revenue growth, which is likely to be in double digits given the expected growth rates of the Indian economy.
Besides banks, we also like the PSU life insurance company trading at a huge discount (LIC).
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