PSU Sector Will Get Massively Rerated Post Election Outcome: Manish Sonthalia Views On Market

Let's take the discussion forward with Manish Santalya, CIO at MK Investment Managers joining us. Manish, morning. Manish, how are you observing the markets right now? Are you constructive on markets given the way quality of earnings are playing out? Or would you be deploying your money on the side or the inflow that you're getting only after this key event actually plays out? Because you would perhaps want to take a relook at your, you know framework and the tilt of the portfolio. No, I think given the situation where we are in as far as elections are concerned, don't think we could have a outlier event on the negative side. So from that perspective, fully deployed as far as the Corpus is concerned and I think as far as the earnings is concerned, broadly the earnings have been in line. You know what was not expected to do well has not done well. So it was not supposed to do that well. Their earnings have come as muted, but otherwise automobiles, banks, pharmaceuticals, capital goods, they have all delivered in numbers. I metals and oil and gas was again supposed to be muted. So I think All in all, the expectation of the result season from where we began the earnings season was of 5 to 6% earnings growth for this quarter except for oil and gas and metals. I think we stand good as far as the earnings growth is concerned. It will broadly be 13 to 15% sort of earnings growth for this quarter sectorally except for metals and oil and gas. So that would be in line with what I don't see too much of a negative surprise as far as key numbers of companies are concerned at least in the large gas space. I think that would also be likely in the mid case. You know ask you about your holdings and capital goods stocks at least the large cap universe came out, not only came out with good numbers but even guided on pretty positive outlook. But is valuation becoming a bit of a challenge there? Are you moving your capital good positions to down the market cap curve or you're holding on to them perhaps not adding but at least holding on to them Capital good companies move more on account of order inflows rather than actual execution on top line. So it is basically book to bill which matters. And since the outlook on the book to bill stands good now even now for the next few years, I don't think you know market will take negatively even if there is let's say a slight dip in margins or you know slight underbeat on the top line front because the outlook and the visibility factor is what gets mattered. And since the outlook on both the government apex and the private CapEx seems to be pretty good, I would believe that you know both the large caps and midcaps, whatever we have, we continue to hold them in spite of a few companies saying that the next two quarters going to be muted or first quarter is going to be soft because of the election. I think market would look beyond that and would move to the second-half of fiscal 25 and on to FI 26. And from that point I think outlook seems pretty good on both top line earnings and EBITDA. From that point of view, I think valuations are likely to hold, it's not going to come down. There is no case of booking profits in capital goods phase, right, likely to remain with elevated valuations, but that's the nature of the business. Markets are moving away from consumption related themes to investment related themes after a very long time. I think this is the just, this is just the beginning of the upcycle. In fact that's quite a bullish note really on the entire theme. But the other thing I want to talk to you about Manish is also the PSU pack and I'm going to you know keep the banks out of that segment. Are you as bullish there as well or do you think there is that event risk of the election which could play sort of spoiled sport in the kind of rally that one has seen in the entire pack? On the contrary, I would believe post election the PSU bank is going to get massively related. And that's my personal view from the point of view of the fact that if you look at the outlook on growth that is pretty good for most of the Psus I would believe related to valuations. I mean they are very, very reasonable. So OMC is maybe trading at A five to six PE or let's say A4 to 5% dividend deals will be in the case of let's say power financers, you know you name it across the board. Psus would have both growth and valuations on their side. And I think when you are looking to find value in such sort of markets, you know this is 1 pocket where you know, I don't think you know, you can ignore this bank as a whole for a great length of time. And from that point of view monopolistic PSU so to speak and including PSU banks where I think valuations are far more conducive. You know, I would believe that its an overt sector to be in particularly positioning your portfolio even before the elections are out or maybe even after the elections are interesting and I want to dig deeper into that. Other than the OMCS, what are the other pockets which are looking interesting because PSU is such a large bucket for monopolistic PSU companies? You have the defense companies, you have the logistic companies, you have the power financers and you have the oil marketing companies, you have the commodity companies. I mean whole lot of them and all of them are trading at very, very reasonable values and I would believe so. If you believe commodities, the there is going to be a dark horse going into the future. Look around you and find the commodity company particularly in the in the commodity space, you know and you will find great value. So it's not only about the earnings load, but it is also about very decent valuation. It's also about the very lucrative dividend and for how long can you ignore all these. It's interesting talking about a RE rating for the election outcome for the entire PSU pack and where do you stand when it comes to pharma? Is it going to be very selective looking at names perhaps within the large cap space or is it the entire spectrum. So when we when we talk about pharma first you know to be noticed is the CDM of space because China plus one is now a reality out there. You have a new legislation get passed which will somewhat make it difficult for Chinese companies to get new contacts and this is what I'm going to given to believe. So the CDMO space particularly when it comes to the biologics you know is going to be a very interesting idea and you have very niche companies out here which will look to get some accelerated business and you know were translated into higher margins and earnings and all of that. The second in line is basically generic pricing has been pretty very decent when it comes to the US. The price erosion that we were used to seeing in you know companies exporting out of India to develop markets. I mean one of those days when you saw double digit pricing erosion out there and that is lending a helping hand to US based gender companies you know manufacturing and exporting out there. And within India I think it is the chronic space which is obviously growing and much more lucrative when it comes to margins. A combination of two or three of them, both, all of them put together would stand in good state when it comes to you know your earnings visibility. Key raw material prices have also been on the softening side. We didn't see too much of you know, dent as far as the margins are concerned. In fact it augmented margins so to speak when it came to gross margins. So all of these things are working in favor of pharmaceutical companies and you could also say that diagnostic companies may be looking at an uptick now given that all the through and the peak when they went through the COVID cycle is now there in the base. So in that space tends to look quite interesting, not all of them, but surely a few of them. So All in all, positive vibes for the pharmaceutical space as well. I mean, there's a whole lot to choose from within that space. One got to take one's own pick in terms of preferences. You know this specialized bearing space. You have some big names out there like Schaffler. I was looking at the way you know bearing stocks are coming back after almost one 1 1/2 year is what's your call on specialized injuring is a specialized injuring bearings related plays. Right now the size of the market for bearings is not that big and within that does the profit pool is shared between these three or four players, known ones and so direct play on your capital recovery cycle automobile is also doing quite well. So both the industrial space as well the automobile space is doing quite well. You have few of them which have a bigger share in the industrial bearings, a few of them have a bigger share in the automobiles. I think all of this translated into much better than expected numbers that were expected by bearing companies this quarter that came as a sort of a positive surprise. Maybe it was on account of railways giving them a lot of business or the automobile space, both the two Wheelers, passenger cars, TV they are doing quite from that point of view. I think the call that is need to be taken out here is the is the valuations otherwise I think it's going to chug along well along with the automobile you know point see that is there in the system as well as the industrial recovery. It is all about a call and valuations and how far growth that you can see in most of these catching your eye Manish when it comes to the new IPOs, upcoming or even recent listings, really not a great fan given the frenzy that is there in the IPO 7. There's a whole lot to choose from within the listed space, but a few of them are definitely worth looking at when they come out, you know in the next few months. But otherwise, you know I would restrict the pop that you see on the listing date and takes out the 5th from most of these IPO companies when it comes to visibly in terms of justification of valuation. You know you got to see time correction for the next one year to see returns get made because you you really don't get any allocation of that. And you know when you come to buy it in the market, the first day takes out the entire appreciation for the next one year at least. So keeping myself totally restricted out there as well, A lot of large banks in your portfolios, but are you also playing the financials without the lenders? Which bucket do you like the platform companies? I think when it comes to the next many years, you know you would see nonlinear growth in most of them particularly the one that BSc, no. So basically capital market platforms, depositories, depositories, exchanges, brokerages, wealth management platforms, you know all of them will see some hyper growth. You know those would comprise of the nonlinearity when it comes to earnings And obviously being platform companies, you know you can actually make a model when it comes to growth in perpetuity and on that basis valuations could be justified. So these are perpetual businesses for many years to come. And no, you know, I mean the longevity of growth when it comes to the financialization of savings gives a whole lot of headroom to look beyond the lenders, you know, even the fintechs, etc. They are quite good. Yeah. OK, fair enough. And you know just a quick word on where you believe valuations are looking a little bit stretched at this point in time and therefore maybe it would be a no go when it comes to looking at that sector and FMCG broadly given the growth visibility of course. I know that you know OpEx have talked about expected demand recovery, but even now the valuations don't seem to be In Sync with what the growth seems to be there. A few of these consumer discretionary names also you know having quite soft have traded at some elevated valuation of business models are pretty good particularly in council few of these retailing companies and they will see growth. But what is the PEG that you want to pay, So you know how their valuations could be a sort of concern. All right, Manish, we'll let you go on that one. Thanks so much for joining us on the show today. That was Manish Suntalia of MK. If you like this video then like, share and subscribe to ET Now.