profit-booking | high beta stocks: Should you be booking profit in capital market plays? This is what Rajesh Bhatia has to say

Rajesh Bhatia, CIO, ITI MF, says analysts are saying there is going to be a 30% growth rate for the next two years and I am going to incorporate that and on that, I am going to give a higher PE. These are highly cyclical businesses and high beta. So if there is a correction in the markets or if there is a decline, that 30% increase assumption becomes a decrease assumption and your PEs contract. So there the capital market plays is high beta and that assumption is a little stretched as far as he is concerned.

What is the right way to look at the most popular PSU space, defence, and railways?
Rajesh Bhatia: In one word expensive. I would say that there has been a structural shift in the defence and railway companies. Railway capex has gone up 10 times in the last few years and the narrative on defence is that you would have to indigenise, you would have to stop imports. Not only that, there are targets for exports. So, my sense is there is a very steady need, given the global context and given geopolitical considerations, we will need to step up capital expenditure as far as defence is concerned. There is a preference for domestic companies. I sense that this is going to be a multi-year narrative. But the valuations are not comfortable at this moment.The other point, of course, is what to avoid in this market. Would you be tempted to book profits? Are there spaces where you think valuations as well as growth have peaked out?
Rajesh Bhatia: Like I pointed out, it is very difficult to kind of call out which has peaked out. You can identify areas of weakness. But look, India is such a fantastic market. As a fund manager, I can have a breadth of sectors in my portfolio, find winning companies in the portfolio, and I am done. It is so simple.

Unlike America, let us say, where the Magnificent Seven are doing well on one narrative, which is artificial intelligence, and we do not know how far to extend that narrative. In India, on the other hand, there are many sectors to play. If ever there has to be some caution, it would be in capital market plays. With the capital market plays, one assumes that growth rates will continue, but growth rates are subject to markets. Analysts are saying there is going to be a 30% growth rate for the next two years and I am going to incorporate that and on that, I am going to give a higher PE. These are highly cyclical businesses and high beta.

So God forbid if there is a correction in the markets or if there is a decline, that 30% increase assumption becomes a decrease assumption, and your PEs contract. So there the capital market plays is high beta and that assumption is a little stretched as far as I am concerned.What is the view on pharma though because of late there has been increased favour towards that because that was one of the underdogs per se. Is there merit in looking at that?
Rajesh Bhatia: Domestic pharma companies are compounding machines. They have done extremely well. So, I would say that domestic pharma is like a branded consumer company. And some of these companies have done extremely well. As far as the global-facing companies are concerned, it is difficult to call out generic cycles. My preference is to bet on companies that are growing their speciality business so that is where the moat is created, that is where the multi-year visibility and fat margins are created. I would want to bet on global markets and companies that are creating these products, which will have fat moats and fat margins.

Let us look at a theme that in a sense has been very popular, a couple of themes, and I will seek your opinion on EVs, EMS, and manufacturing. These stocks are now trading at PE multiples which are higher than consumer and their margins are 12-13%. Their ROCE is not that great. What is happening in this space?
Rajesh Bhatia: In bull markets, the vision of investors becomes longer, and in a bear market, the vision of the investor is shorter and shorter. So, we are in a bull market. So clearly, people are kind of seeing into a more distant future. As far as electric vehicles are concerned, from point A to point B, the direction is clear. We are going to move to electric vehicles. I was reading a very interesting article in Fortune on Volkswagen, the largest automobile company in the world, which has been late to the EV party. But they are committed to EV. They are saying it is inevitable, because the costs of electric vehicles will move down over time and the costs of ICE engine vehicles will move up.

So, the economics are going to move in the favour of EVs rather than ICE. Now, the challenge is what happens in between, like, as Bill Gates says, with technology we overestimate what technology absorption is going to be in the short term but underestimate it in the long term. We are in the process of probably overestimating how much of this is going to happen in the short term, although I think the direction is clear.

I can elaborate on that, but, the point is that with electric vehicles there are a lot of things yet to happen to absorb, in the two-wheeler space, the market that electric vehicle two-wheelers have got is about what 7% and two-wheelers is not a very fast growing market in India, it is already a highly penetrated sector. So, the absorption there is about 7%. A lot of forecasting is taking place with this business, but a lot of things have yet to pan out. How will the subsidies pan out? What rate will your costs come down? What rate will consumers start accepting for this product given range anxiety etc. A lot of things are yet to pan out. But from point A to point B, it is clear that EVs will be a dominant play as you move forward.

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