Indian manufacturing sector to be a major theme for next few years, says Ashutosh Tiwari of Equirus

Ashutosh Tiwari, Managing Director & Head - Institutional Equities at Equirus, believes that presently, investors should exercise caution and remain with companies whose valuations are not high, particularly in mid- and small caps, given that these values are at the higher end of the historical range. 

Further, Tiwari noted in an interview with Mint that it is doubtful the Reserve Bank of India (RBI) will act quickly to lower rates, although domestic factors seem favourable for a rate cute. Ashutosh also spoke at a length about the domestic themes, Q3 earnings, foreign institutional investors (FII) and domestic institutional investors (DII) inflows, IPO market, and more. Edited excerpts:

Which domestic themes are you really optimistic about and think will do well in the long run, regardless of the results of the election?

The Indian manufacturing sector is likely to be the biggest theme for the next few years. We are seeing a cyclical revival in some of the asset-heavy segments after 8–10 years of a down cycle, like real estate, power, etc. Real estate started seeing a revival over the last 2–2.5 years, while power has witnessed the same in the last one year. Generally, these cyclical revivals last for 7-8 years, and we expect the same this time as well. 

Apart from this, the government’s thrust on local manufacturing and the China/Europe+1 theme are also boosting the manufacturing sector as a whole. Industries dependent on this directly or indirectly, like cement, building materials, industrial, capital goods, infrastructure, and construction, are also likely to do well. Public Sector Undertakings (PSU) banks, which lend higher to asset-heavy businesses, are a better investment proposition compared to private banks at this juncture.

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How has the market been impacted by Q3 earnings? Which sectors, in your opinion, performed well and which ones lagged behind?

Generally, margins improved across most of the sector as the full impact of commodity price softening was seen. Even information technology (IT) companies margins improved during the quarter. On the demand front, though, it was soft across most of the sectors. Cement demand, which was pretty strong during the first half, also softened during the third quarter. One bright spot, though, was demand improvement from rural areas across many sectors, especially discretionary items. After many quarters of soft demand, we saw the first signs of improvement in rural areas like 2Ws, etc.

Export-related industries were most impacted, as while demand remained soft in Europe/USA, exporters also got impacted by Red Sea issues, which has increased transportation costs as well as transit periods. Chemical companies continued to report soft numbers, and the same is likely to continue over the next two quarters as well, at least.

Also Read: Stay light ahead of the elections; defence, engineering, railways, infra look overvalued, says Jimeet Modi of SAMCO

How do you view the current market scenario? The markets are becoming quite volatile as the election approaches. How may investors profit from this volatility?

US inflation remains sticky vs earlier expectations of a fall which is putting question marks on rate cut expectations in 2024, and gradually the estimates on the quantum of the cut are coming down. US bond yields have also hardened over the last one month due to the same, due to which liquidity is likely to remain tight in global markets, and hence markets have become volatile in recent months. 

With valuations at the higher end of the historical range, especially in mid- and small caps, investors should observe caution and stick to companies where valuations are not irrational and are backed by historical earnings rather than investing in companies where everything is dependent on future growth expectations.

Also Read: Use corrections to add quality stocks, follow a stock-specific approach, says Jaideep Hansraj of Kotak Securities

While the US Fed indicates 'patience' with rate cuts, do you foresee any policy easing from the RBI soon?

While domestic factors are conducive for a rate cut, considering the fact that US rate cuts are getting postponed due to the factors mentioned above, it is unlikely that the RBI will be in any rush to cut rates as it has to maintain a gap between US and Indian bond yields to avoid a flight of capital. 

In the RBI’s Feb’24 policy minutes, the case for a longer pause is more entrenched with new notes around risk from aggressive market front-running, with Monetary Policy Committee (MPC) thinking that any policy accommodation with 7% growth could become inflationary. While the other notes for pause mentioned in the policy announcement, viz., incomplete transmission, risks from food inflation, geo-politics, and the challenging last mile, are re-emphasised.

Also Read: Indian stock market sentiment upbeat but investors need to be cautious, says Divam Sharma of Green Portfolio, PMS

How do you expect the year's FII and DII inflows to unfold? Could you list some factors that may influence them?

Systematic investment plan (SIP) inflows in the domestic market have remained strong as investors have made good returns from equity markets over the last 4 years. Over the last 2 years, multiple times it was highlighted by some market participants, including FIIs, that Indian markets are overheated and correction is imminent, but meaningful correction never happened, and markets bounced back strongly post small correction phases, and hence retail investors’s convictions on equity as an asset class have improved drastically post-COVID. 

DII flows are therefore likely to remain resilient going forward as well. While India is one of the few countries where growth visibility is very strong due to the pick in manufacturing, uncertainty over US rate cuts, rising bond yields, and tighter liquidity conditions are likely to keep FII flows volatile in the near term.

What would be your asset allocation strategy in light of the numerous events scheduled for this year on both the domestic and global fronts?

Considering the current valuation of the market, especially of mid- and small-cap stocks, many of which are trading at more than 2 standard deviations from the historical mean, we would suggest to keep higher allocation of capital to large caps in 2024. Balance advantage funds will be a better proposition for retail investors as it can cut the risks associated with pure equity investments.

How do you think the IPO market has performed so far in 2024? Do you expect more IPOs to hit the primary market going forward? If yes, how will that impact the liquidity in the secondary market?

IPO market activity remained healthy last month as well, despite earlier expectations of softness ahead of general elections as results of state elections has provided comfort to investors that the NDA government will come back to power and hence continue existing policies. Considering the volatility in the market right now and the elections around, we expect some moderation in IPO activity over the next few months, especially from large companies. However, it will again pick up in the second half of 2024.

Also Read: Why Chris Wood sees 7% real GDP growth and 12-15% earnings growth going forward; lists 3 achievements of PM Modi

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.