Strong corporate earnings ahead, will invest in new-age internet cos at appropriate time | INTERVIEW

Even after scaling fresh highs recently the journey for Sensex and Nifty looks brighter ahead. Sachin Shah, Fund Manager, Emkay Investment Managers Limited in an interview with Kshitij Bhargava of The Outlooker Online said that he sees high corporate earnings growth over at least next 2 years with opportunities for investors in various sectors emerging. He also shed light on his analysis of the new-age internet companies knocking on Dalal Street doors and tells if he would invest in such stock. Here are the edited excerpts.

Sensex and Nifty are at their all-time highs should investors wait for fresh buying opportunities or dive in at this juncture?

We strongly believe it (outlook for domestic stock markets) is quite positive. Our positive bias is based on our outlook of high corporate earnings growth over at least next 2 years. We believe there is a high probability Nifty Earnings over next 24 months (FY22 & FY23) will grow above 25% CAGR. The selective mid & small cap indices/portfolio earnings are expected to grow upwards of 30%-35% CAGR over two years. 

In the last 12-15 months, COVID has played a role of catalyst for Indian corporate, particularly in listed companies space as is reflected in the last three-four quarterly results. 

1. Most of the Indian companies have driven cost efficiencies across all operational levels, saved money on lower interest cost and lower taxation. This has significantly improved the profitability of listed corporates.
2. We have also observed the organised players gaining market share, as post the initial months of lockdown the unorganised players did not have the wherewithal either in terms of informal financing, getting back the migrant labour force, support from vendors supply chain, etc. to get back there supply in the markets.   
3. We also are witnessing significant amount of spending by the government in rural areas, which is supporting the aggregate demand at the country level. 
4. The other most important catalyst has been the China+1 strategy, significant opportunities for export-oriented businesses are now culminating in to higher inquiries and orders as most of the global purchase managers are looking for alternatives to China.  

What are your views on new-age internet companies, such as Zomato and Paytm, coming to Dalal Street? Would you invest in them?

Some of these new-age internet companies have truly found there space under the sun. The most important thing to understand is that they have very clearly identified the problems of consumer and addressed them with highly reliable and scalable solutions. This has definitely disrupted the legacy service standards of conventional business models and the best part is consumers are lovingly and whole-heartedly embracing it as it is genuinely removing the hindrances for their consumption of multiple services and products.  

Clearly, some of these businesses are here to stay. We, therefore, have them on our radar, at an appropriate time (reasonable valuations) we would like to invest selectively in at least couple of them.   

Do you think midcaps and smallcaps are still lucrative for investors?

We are expecting an overall revival in aggregate demand, higher market shares and profitability for organised players, we believe the tail-wind for mid-small cap companies is quite strong. They tend to have much higher operating and financial leverage during the high growth phases. 

Also important to understand is mid-small cap investing is largely bottoms-up investing. We, therefore, believe Indian listed space has many dynamic entrepreneurs in the mid-small market space who every 5-10 years emerge as winners in their respective industries, the trick is to identify and back such promoters / managements for wealth creation. 

A lot of investors believe valuations are expensive in mid-small space, important to understand is valuations standalone will have no standing, they have to be considered in the context, which is business outlook and if one believe the mid-small companies can deliver higher earnings growth over next at least 2-3 years, than in that context they may look reasonable. 

Where are you spotting opportunities in this market?

We believe there are quite a few sectors –

Auto & Auto-ancillaries
Secular demand in the domestic markets, driven by under-penetration and higher per-capita income. Huge export opportunity in China+1 strategy of global customers and incentivisation by Government of India and PLI schemes and other fiscal measures.

BFSI
The financial sector best placed than ever. Private and PSU banks well capitalised now, corporate NPAs recognized, resolved and provided for. Niche plays available in mid and small cap segment to benefit immensely with uplifting of the economy

IT
Post-covid business transformation. Digitisation, Automation & IOT takes centre-stage. Every stakeholder, be it customers, vendors, employees inter-connected on real-time basis    

Pharma & Healthcare
Innovation by emerging pharma companies. In areas of speciality products, biologics, chemical synthesis and limited-competition generics offer high margin growth.