“The IT sector presents a compelling opportunity. Despite high valuations of companies like Nvidia, the demand for AI capabilities implies significant growth for IT consulting companies. Indian IT firms, in particular, are poised to benefit from this trend and are currently trading at low forward earnings multiples,” he says.
Edited excerpts from a chat on value picks, Budget ideas and PSU rally.
How are you approaching the market ahead of the Budget? Do you think the bias towards capex, infra and PSU related themes will remain intact after July 23?
The Government’s focus during the initial phase of Amrit Kaal is primarily on creating infrastructure to reduce logistics costs from 14% to 8%. This long-term goal, expected to span over a decade, hinges on developing Railway Infrastructure and integrating it with other transport modes through multimodal logistics hubs. Thus, capex for railways, ports, roads, and airports will be prioritized. Additionally, digital infrastructure will continue to receive support. We anticipate that the emphasis on Railway, Power, and Defence PSUs will persist in the upcoming budget.
Overall, what are your expectations from this year’s Budget as an investor?
From an individual’s perspective, changes in tax slabs and other tax breaks are expected, likely boosting demand for housing and consumption. On the business front, we can anticipate the continuation and expansion of Production Linked Incentive (PLI) schemes and other R&D or capex-based incentives across various sectors such as electronics, pharmaceuticals, textiles, data centers, green energy, clean tech, and AI.What can be the best and worst-case scenarios for investors in the Budget?
The best-case scenario involves substantial changes in the individual tax code, significant investments in infrastructure, and incentives for favored sectors. Conversely, the worst-case scenario would be minimal changes in tax slabs and limited incentives for the PLI scheme.
Would you agree that PSU rail stocks are a momentum play in the short-term but pricey to own for the long-term?
PSU railway stocks have significant growth potential due to their large order books, which are likely to expand further post-budget. The focus on faster execution is expected to boost revenues and profit growth. If growth rates are achieved, current valuations are justified; otherwise, they may appear stretched. However, this scenario doesn’t apply uniformly across all PSU stocks.
Which pockets of the market do you think offer enough value even at this stage of the bull market?
Our analysis highlights several promising sectors. The most attractive is the banking sector, both public and private. With rising credit demand from capex and consumption, we expect mid to high double-digit asset and revenue growth, leading to accelerated earnings. These stocks are available at low P/E ratios.
The power sector is another area of interest, with certain generators having substantial capital work in progress. As these projects come online and start generating revenue, earnings are expected to accelerate, and these stocks are also available at low forward P/E ratios.
Lastly, the IT sector presents a compelling opportunity. Despite high valuations of companies like Nvidia, the demand for AI capabilities implies significant growth for IT consulting companies. Indian IT firms, in particular, are poised to benefit from this trend and are currently trading at low forward earnings multiples.
How do you read the sustained rally in PSU stocks after the elections? If someone is investing for the next 5 years, does it merit investing in PSUs?
At OmniScience, we prioritize a company’s competitive advantages and profitability over its ownership. Some PSUs exhibit high profitability, large growth opportunities, and capital efficiency, making them attractive investments. However, valuation is key. While many PSUs were undervalued, some have now approached their intrinsic values, implying market-average returns if all goes well. Yet, a few still possess the discussed qualities and remain undervalued, presenting good long-term investment opportunities.