Various Sectors Are In An Almost Coordinated Upcycle: Gautam Duggad
Transcript
00:00 Hello everyone, we have Mr. Gautam Dugar from Motilal Oswal on the sidelines of India Opportunities
00:04 event. Thank you so much, Mr. Dugar for taking your time to talk to us. We are talking about
00:08 the big opportunities in India. Where do you see that happening? Which sectors do you think
00:14 the opportunities are going to come from? And you know, the growth opportunities that
00:18 investors should be keeping a track of?
00:21 Good evening. I think as the economy expands from 3, 3.5 towards 5 and 7 trillion, many
00:26 sectors will open up and opportunities will come in a plethora of sectors. Financialization
00:31 of savings is the biggest opportunity in my view. Consumption remains an evergreen opportunity
00:36 in India. Manufacturing is opening up in the last 3-4 years. The kind of focus the government
00:40 has on PLI, manufacturing, exports, the whole ecosystem is opening up. And then there are
00:45 various sectors which are almost in a coordinated up cycle. You know, sectors like real estate,
00:51 which has slowed down for the last 10 years, they are opening up. Sectors like hotels,
00:55 real estate, capital goods. So, I mean, there are a lot of opportunities for investors who
01:00 have got a discerning eye and willing to do the hard work.
01:03 But when we talk about the opportunities, we also need to keep in mind the risks that
01:07 are going to be attached. So, what according to you are going to be the top risks, at least
01:11 in the next few years, given that, you know, we are seeing a bull run, but you know, there's
01:15 something that you would ask the investor to be cautious about.
01:18 So there are always risks lurking around the corner. The biggest risk is something which
01:23 is unknown. You know, you always see that the market corrects on events which are unforecastable.
01:29 You know, Russia, Ukraine came out of the bold. COVID-19 came out of the bold. So some
01:34 such events can always come and spoil the party. But something which can be forecasted,
01:38 I think the biggest risk or rather uncertainty around the corner is the 2024 election outcome.
01:44 That I think will acquire a disproportionate importance as we move forward into calendar
01:48 year 2024. Then there are global risks on slowdown, interest rate and, you know, inflation
01:53 is very sticky in the developed world. To that extent, yesterday's US CPI data is quite,
01:59 has come as a breath of fresh air. But the biggest two risks, I would think from India's
02:03 point of view are political risk going into 2024 elections and the global growth and inflation
02:08 paradox, because that has a significant relevance for the capital flows into India, which has
02:13 seen some sort of a revival after a big drawdown between October 2021 to February 2023.
02:20 Sir, also when we talk about the bull run, where do you see the market being headed?
02:25 Because there have been concerns on equities being overly or rich value, right? So do you
02:31 see the markets correcting in the near term? Or how do you see the markets going forward?
02:35 So first of all, I don't agree that equities are richly valued as it. Nifty at 19,500 is
02:41 somewhere about 19 times. One must remember that the market has spent last 18 months in
02:46 consolidation. We last at 18,500 in October 21. And now we have crossed that by a margin
02:53 of 4 or 5% after two years almost. In between earnings have gone up around 15 to 17%. So
02:59 what that means is the valuations which were at 21 times when Nifty first at 18,500 in
03:04 October 21 are now at about 19 times. I do agree that some pockets of mid caps and small
03:09 caps have seen exuberance and there the valuations are quite rich. 5-10% pullback index is par
03:15 for the course any time, which cannot be forecasted. But investors who have a long term horizon,
03:22 I think they should be prepared for such kind of pullbacks which happens very regularly
03:26 in the market. Every three years, five years we have seen markets correcting 5-10%. So
03:30 I think that is something which is quite natural. And it also provides foundation for the market
03:35 to move up for the next leg. But I actually as far as Nifty is concerned, I don't think
03:40 markets are very richly valid because the earnings growth has been quite strong. And
03:44 if what we are forecasting for next two years at about 17% earnings CAGR, then on FY25 Nifty
03:50 is actually trading at 17.5 times. So because the earnings growth has been quite strong,
03:55 in fact, NSE 500 profit pool of India has gone up from 4.5 trillion rupees in 2020 to
04:01 about 11 trillion. So more than 2.5X growth we have seen in corporate earnings. So that
04:05 has actually resulted in earnings basically bringing the valuations down over a period
04:12 of time.
04:13 Sir, you mentioned that capital goods and infra for that matter has been picking up
04:18 when you talk about sectors for that matter. So that way, what about the CAPEX cycle that
04:22 we are seeing an uptick, but do you see any challenges in there as well?
04:25 No, actually the CAPEX cycle has seen challenges for last entire decade. It's just about started.
04:30 We've seen just one year of upcycle in CAPEX. And I think after a long, long time, capacity
04:35 utilisation of Indian corporate sector is going up. The corporate leverage is at a decade
04:39 low. And these two factors, higher capacity utilisation and a lower leverage makes a perfect
04:44 combo for the onset of a new private CAPEX cycle. What we have seen over the last four
04:48 or five years is the government has been basically front-ending the CAPEX. The government, state
04:54 or central, they've led the CAPEX cycle for last four or five years. And now the private
04:58 sector I think will make a comeback because the cost of capital is also quite stable.
05:03 We've seen capacity utilisation across the sectors going up and the corporate leverage
05:06 is at a decade low. So I'm quite sanguine that the next four to five years, you will
05:11 see a very strong CAPEX cycle. And as one of the panellists mentioned in your show today,
05:16 the quality of the CAPEX cycle this time around should be far, far better than the quality
05:20 of CAPEX cycle that we have seen in 2003 and 2008, because that CAPEX cycle in its aftermath
05:26 left behind a huge leverage issue for banking and the broader corporate India Inc. I think
05:33 this time around the quality of CAPEX cycle will be very different because the leverage
05:36 is quite low.
05:37 Thank you so much, sir, for taking your time and talking to us. Thank you.
05:39 Thank you.
05:40 Thank you.
05:41 Thank you.
05:42 Thank you.
05:43 Thank you.
05:48 [BLANK_AUDIO]