Help us with your take on the markets because it seems like that the market is seem to be climbing the wall of worry with respect to tariffs, lower earnings growth. But help us understand that is this a temporary bounce back or a dead cat bounce is what you are seeing or believe that the valuations are much more attractive right now and this is the time where you go ahead and chip in some money?
Abhay Agarwal: If we just take a step back on the market’s part, what we saw was that as soon as Trump won the elections, there was a one way sharp rally in the US dollar index, almost 9%, which was unprecedented. Even in the last presidency of Trump, the US dollar strengthened by only 3%. Now, what that meant is that with his tariff threats, the market was already anticipating, the global markets, that there will be higher inflation in the US because of tariffs which means that there will be no rate cuts and higher bond yields further took up the US dollar and that created a perfect storm for the Indian stocks because what we saw is that heavy FPI selling, a lot of money going back to the US to benefit from high yields in the US and the strong US dollar.
Now, some of that is reversing and for India it was a bigger problem because we came in in January, the quarterly results were below par, gave another reason for investors to sell. But a lot of it is now settling down. We are seeing a fall in US dollar.
We are seeing a fall in US dollar yields. Now, there is no fear that yields will spike further. And what that means is that we are seeing early days of some FPI flow reversals to emerging markets, early days but between now and April we will see a strong bottom formation in a market that has been terribly oversold and very-very aggressive selling by FPIs, the valuations have settled down. I do not think they are as frothy as they were.We are seeing volumes being very low over the last three-four trading sessions because of which stock prices have been fairly volatile. So, we are as near the bottom as one can be, though it is difficult to call, but this kind of aggressive selling followed by poor volumes, typically means that the markets are bottoming out. There are no buyers, no sellers. So, as liquidity comes back to the market, you will see the markets stabilising between now and April.
Amid a market like this, where are you seeing some early opportunities if any, if any early green shoots or pockets of value if you are observing?
Abhay Agarwal: So, fundamentally what we keep doing is that we keep doing channel checks with our network to understand how the domestic consumption is panning out.
Around the festive season last year, we saw the consumption fall off the cliff because of a couple of reasons. One, the interest rates were high, EMIs cost had gone up, the taxes were high, and overall inflation levels were high and that led to very high channel inventories across product categories like autos.
Even in real estate, we saw inventory buildup. We saw inventory in channels in stuff like paint, polish, tiles, plywood. And then in January, what we saw that there were deep discounting to get rid of that inventory.
And where we are now is that the channel inventories are actually quite lean. The auto sales have not really picked up dramatically, but they are not as bad as they were post festive season.
So, with interest rates coming down, tax cuts being announced in the budget, there is more consumer behaviour is kind of early stages of changing positively. So, we are seeing green shoots on the consumption side, discretionary consumption and if that happens, the sectors that will benefit immediately are banking and financial services.
We saw a lot of provisioning last quarter by small banks because of lower collections. But these lower collections were not from people who were habitual defaulters.
They were from people who just did not have the cash to pay. So, some of that money has started to come back.
So, you will see some provision write backs because these were not actual losses. So, in terms of sector, I would say domestic discretionary consumption sector is looking pretty interesting. Banks, especially small banks and NBFCs where people have thrown in the towel expecting massive write downs, that will make a comeback. So, these are the two sectors that we are betting on actually now.
Also, talk to us about the EMS side because what we have seen is that there has been some concerns regarding the high valuations. What has been your reading on this one? Believe that you have made some of the recent additions into this particular sector. Help us with your rationale.
Abhay Agarwal: So, EMS is a space we are very positive on. This tariff pressure, if I may call it that, is adding to the government’s plan of localising manufacturing of electronic components which do not need to be imported. I mean, these are not very high precision items that we cannot make in India.
So, through PLI schemes, the government has been very focused on over the last five years of supporting domestic manufacturing of components across the space.
You have companies that are catering to consumer electronics like TV, fridge, mobile phones. You have defence equipment, you have networking equipment, computer equipment, railway equipment.
A lot of companies have benefited from that PLI and are now becoming large scale manufacturers, very competitive now, slowly at global scale also.
This is a very high growth sector, but what we saw is that there was a lot of bullishness which took the valuations to what I would say were frothy levels.
A lot of that has corrected. Now, we have seen 30-40% stock price correction and this is the growth sector one can easily bet on. The valuations will always be high on a relative basis but if you look at companies like, these are not buy recommendations, but companies like Kaynes, Syrma, Amber, Dixon, these are the companies which are right at the forefront across product categories. So, with government support and a lot of support from the domestic consumers, this is like a decade long story on the EMS side.
I am just taking a look at your portfolio. Some of the deletions include big names like Grasim, Hindalco, Reliance, and UPL. Help us understand the rationale behind this. We have been seeing positive news coming in for Grasim yesterday. If you take a look at Hindalco also, over the last one month or so, it has given decent 10% return. What is the rationale behind getting all of these stocks out of the portfolio because Reliance, I understand the kind of correction that we have seen recently but help me understand the rationale behind Grasim and companies like Hindalco and UPL.
Abhay Agarwal: The reason was that some of these stories have already played out and these are not very high growth stories. So, what I would call them as defensive names. And for us, it was tactically rebalancing our model portfolio to get out of some of the low growth largecap names and actually benefit from this sharp correction to get into some high growth small and midcap names.
So, it is just for that reason there is nothing negative that we have against these companies. The reason to exit was not that we do not expect these companies to do well. It was just that on a relative basis we see better opportunities during this sharp correction and as fund managers, our objective is to take long-term view, three- to five-year perspective, and there we see better growth stories at valuations that are looking far reasonable right now, so that is the only reason. I mean, there is no other reason than that.
