Which stocks are you probably going to keep in the family for a long, long time? HDFC Bank used to be considered a part of that family jewel. You also had the likes of Titan, etc. But all of these defensives are under pressure right now. Do you think it is time to churn the portfolio? Or if you have a long view, should you just stick with them? What is your view?
Abhay Agarwal: Regarding HDFC Bank, and not just HDFC Bank but all private sector banks, this is not a buy or sell recommendation. We have not had HDFC Bank in our portfolio since January last year, once they announced the merger with HDFC Limited. The reason is that for large-cap private sector banks, the peak Net Interest Margin (NIM) is already behind us. We see margin compression, the cost of deposits going up, and deposits themselves not increasing, so the cost of funds is rising. At the same time, there is pressure from the RBI to transmit rate cuts down to the borrower level. In that scenario, it is clear that for the next year or so, you will see margin compression and a slowdown in business until private capex picks up significantly. The credit offtake at the enterprise level will slow down. Considering all that, and looking at valuations which are still not cheap despite the sideways correction, with these banks trading at two-and-a-half times book value multiple, making them the most expensive banks in the world, we have stayed away from private sector banks.
The only bank we had was ICICI Bank. So, that is a space we are not in a hurry to enter. We will watch. I think it will go sideways for some time. However, we are excited about some sectors that investors are not currently looking at: insurance (both life and health), agrochem space (both small and big companies), where there is a big focus from the government on increasing farm-level income. We see good opportunities in the pharma space, especially pharma generic exporter companies which have not performed well for many years. I think there are opportunities in the less popular sectors where money can be made over the next two to three years.The other big theme we have been discussing for the last 12 to 18 months, and which is fairly well-known now, is manufacturing and defence, and even electronics manufacturing. Do you still find value within that basket?
Abhay Agarwal: We are very bullish on manufacturing as a theme. I think it’s a decade-long story from here. It will continue to play out. Different segments within manufacturing will obviously be favored at different times. Defence and PSU manufacturing are currently very popular in the market, which is why some of these stocks are already pricing in future returns. I am not sure how much return potential is left for investors entering now.
However, if we look beyond defence to core manufacturing, especially companies that are exporting, there is a tremendous opportunity. For the first time, we are seeing through our channel checks and company discussions that large electronic manufacturers in India are accessing the US markets directly, not through tie-ups, and this will start showing up in their numbers.
The market will start recognizing that as well. Additionally, the outsourced manufacturing of electronics is a significant theme that has already played out and continues to do so. Overall, in manufacturing, there is still a long way to go in terms of returns. Investors should look at sectors that have not yet gained popularity but have the potential to be profitable.