Being a vote on account budget, major policy announcements are unlikely but Vikas Gupta, smallcase manager and OmniScience Capital CEO, expects an increased allocation in railways, power and renewables. “Besides roads, airports, ports, and waterways should also be in the spotlight,” he added. Despite the stellar rally in defence, railway and power stocks, Gupta believes defence is approaching fair value and some stocks in the sector are slightly overvalued. At the same time, railways, though not fully valued yet, is nearing fair value whereas the power sector remains an open opportunity. That said, Gupta has taken a contrarian bet on the tech sector, both in US and India. Edited excerpts:
With the budget and general elections nearing, are there any dominant themes this year? Some market participants are contemplating a pause due to these major events. What are your thoughts?
We are far from a bubble. The economic cycle is just beginning, with government investments, and now, private sector investments are driving the cycle. Private sector commitment is anticipated to last three to five years, with the current economic cycle likely in its second year at most with the peak expected around the fourth or fifth year.
We anticipate a significant upswing in investments. The government follows a marathon-like policy, focusing on extensive infrastructure development with a focus on logistics, especially railways, roads, waterways, and airways, and smart multi-modal hubs.
Are there specific developments or announcements you are anticipating in the upcoming budget?
Being an election year, new policies are unlikely. However, we expect increased budget allocation for initiatives like Amrit Kaal and PM Gati Shakti. Projects which are near critical milestones are likely to get increased allocations to help complete them before the end of the term.
Are there specific sectors where you anticipate an increase in allocation?
Railways and power, with a focus on the Dedicated Freight Corridors (East & West), renewables and clean tech, are likely to get priority. Besides roads, airports, ports, and waterways should also be in the spotlight.
What is your analysis regarding the recent surge in sectors like power and industrials? Do you believe there is still momentum in these sectors, both from a valuation and fundamental perspective?
We identified sectors like railways, defence, technology and power early on, holding them in our portfolio for the past three to five years. While defence is approaching fair value and is slightly overvalued in some stocks, we are actively seeking new additions. Moving forward, we might not find pure-play defence companies, so our strategy involves adding firms with diverse industrial and civilian operations that also have a segment in defence or supply components to defence companies. Railways, though not fully valued is nearing fair value. And the power sector remains an open opportunity.
Are there pure-play opportunities still in railways and power?
Certainly. Railways has a dedicated pure play within our investments. Power is considerably undervalued due to negative market sentiment. Besides, banks are another opportunity.
Are there specific global themes you are looking at?
An important global theme lies in the tech sector, specifically driven by digital transformation (DX), cloud computing, and artificial intelligence (AI). This trend is expected to have a lasting impact, spanning more than a decade.
Still there is concern about a potential global slowdown leading to spending cuts for IT firms. Do you believe the positives will outweigh the negatives in this scenario?
Our view on the technology sector, both in the US and India, is contrarian. We believe challenges to the US economy are behind, with technology companies having already rationalized their workforce. The turnaround has started with sustained double-digit growth rates likely. Tech spending, initially held back by economic uncertainty, is now on the rise, confirming our earlier prediction that a recession is unlikely. US economic indicators, such as robust GDP, falling inflation and low unemployment rates, support this positive outlook. The main global concern is China’s economic performance affecting global demand.
Global investors are looking for alternatives to China for emerging market (EM) allocations. India has substituted China as the main EM allocation and investors are looking for EM baskets ex-China or a dedicated India allocation causing flows from China to India for the next several years.
What caused the recent shift in sentiment away from China?
In China, there are two aspects to consider. There is a strategic tilt worldwide to transform the global supply chain with reduced dependence on China. Additionally, the tactical consideration that decades-long excessive leverage might cause economic conditions in China to be challenging for several years, has prompted a desire to exit.
Are there any hidden opportunities or sectors that the market may have overlooked or not yet recognized?
One opportunity is Clean Tech, especially hidden within the conventional energy sector. While Mr. Market is closely monitoring crude oil prices, traditional energy companies are making substantial investments in clean tech, particularly in renewables. Major oil marketing companies are planning to establish around 26,000 electric vehicle charging stations by 2026, a significant contribution to EV adoption. Additionally, companies involved in oil exploration and production are making substantial investments in renewable energy and green hydrogen. Similarly, power generation and financing companies are focused on clean tech and renewable financing.
Is there anything that you feel is overhyped at this point in time?
Many known trends like consumption, electric vehicles, clean tech are overhyped, with the popular names becoming extremely overvalued. For consumption, look for telecom, UPI and credit card plays rather than FMCG. For EVs, look for conventional automobile companies developing EVs rather than pure-plays and diversify within the ecosystem to electricity producers, charging services, and battery manufacturers. An example is a well-known battery manufacturer which is a leader in conventional batteries and has earmarked substantial cash reserve for capturing nearly 15% EV battery share by 2030. Expand your search horizon across the ecosystem of a theme to identify non-obvious opportunities which are also driven by the theme, but which Mr. Market has missed so far.
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Published: 30 Jan 2024, 01:07 AM IST