investment strategy: consumer discretionary is in an ideal position for the next 12-18 months: Sailesh Raj Bhan


We are entering a phase of consolidation where the markets will examine how the larger sectors that have improved over the past 12 months and are starting to produce in terms of earnings. The recent correction reflects some consolidation and a very strong three-year earnings environment in India, ”says Sailesh Raj Bhan, senior fund manager, Nippon India Mutual Fund.


Do you think the running of the bulls will continue in 2022?
Some of the bull run has certainly happened over the past 12-18 months and we’ve seen a substantial reassessment. We are entering a phase of consolidation where the markets will examine how the larger sectors that have improved over the past 12 months and are starting to produce in terms of earnings. The recent correction reflects some consolidation and a very strong three-year underlying earnings environment in India.

The last few years have been pretty weak and we’ve seen an improvement come in and when you see these big sectors pulling, it can hold up for a while. Overall, a strong earnings environment over the next three to four years should benefit.

Over the past profiting season, Indian corporate margins have been squeezed due to rising inflation. It is now a global problem. Inflation in the United States is at its highest level in four decades. We have seen the action of the FOMC. The Bank of England responded with a rate cut off the turn. Back home, let’s see what happens. How would you play with this theme in the markets?
Inflation is real in the sense that it affects all sectors and certainly has an impact or push on prices. Businesses have no choice but to raise prices. The only point is that this happens after an extended period of five to seven years of companies’ squeezed price increase capacity.

This is sort of a welcome relief for a lot of companies in terms of the ability to price commodities in particular. Directionally, the pressure on consumption is there. The reality is that November has generally been a bit weaker. The post-holiday season has been weaker in India and a few pressure points exist as larger price increases exist and consumer stress is visible today. We’re seeing a slowdown on the rural side and some kind of pressure because of the bigger increases that businesses have to take.

Inflation is also distorting a bit as we had a very low inflationary period before the rebound in the last 12 months. Now from the bottom we see a very clear change. As things normalize over the next 12 months, we would see inflation absorbed from a corporate profitability perspective and normalized margin should be back in a few quarters in India.

Zomato’s profitability is low or rather the loss is higher and the market capitalization is higher. This is the same with some of the other new listings. How are you adapting to these changes?
In most companies of the new era it depends more on how they have been valued in the private market and some of them are reflected in the public market as well. We pay a lot for a lot of these new age companies in terms of initial valuations.

In a few companies a certain premium is warranted, but we find that because the markets have been so good for the last six to nine months and valuations, a lot of these private companies are getting pretty high. We are seeing a flood of IPOs. Some streamlining or resetting of the way government markets perceive private companies coming in for listing is clearly visible in recent months. Our approach is therefore very simple.

There is the right to win. We are willing to give a premium to a longer time horizon when we find that even the business model or type of scale and scope of the opportunity is limited. There, the evaluations are far from reality. We completely avoid these spaces and so it’s a mix and match. Pick a few good opportunities to gain opportunities and maybe give them a little higher than normal valuation while avoiding 80-90% of those companies.

In the past you bought Info Edge, now Naukri. You have integrated the entire living space very well. You bought specialty foods. How do you bet on the consumer space?
After a few years of consolidating valuations and slowing growth, consumer valuations are starting to normalize. Valuations are squeezed by around 20-30% at most of these companies, but the recovery and rebound in growth is still a long way off. I don’t think this is a very easy trip as Covid has certainly impacted lower middle India in a certain context in terms of income and savings. A certain slowdown in consumption seems to be the challenge today and it will play out over the next 12 months. This is a reassessment for pure consumer businesses and although consumer staples don’t appear to be the case, consumer discretionary, which targets the 10-15-20% of India, seems less affected.

So there is a possibility to participate. Nothing is free on the market today. Valuations are not what they were 12-18 months ago so you have to be very picky and selective, but companies serving the top 20% are doing well and seem to be in an ideal position for the 12-18. next months as well. .

You bought stocks like Linde India and there is a big commitment. Are you betting on all this clean energy space, new energy, hydrogen?
Some of the investments in the industrial sector, made in recent years, have been more in terms of economic recovery, volume, manufacturing, industrial activity and capacity building in India. Underlying factors like low taxes, very low interest rates and now the political environment favors everything related to manufacturing.

The investment is much more likely to do well over the next four years due to the weaker performance in the past and also changes in demand, location and all the other factors; China plus a factor also supports this. So the core belief of investing in consumption is an important theme over the next three, four years and a lot of our investments contribute to that.

Some of the investments go into pretty much anything that happens in the manufacturing sector that requires industrial gases or the creation of capacity or companies that rely on the growth of capital goods. Our aim is to choose those types of businesses that can eventually have revenues that are maybe double or 50% higher than the average index revenues and this is where the opportunity to capture growth remains in India today. ‘hui.

You managed a pharmaceutical fund. MNC pharma, domestic pharma or API pharma – where do you see the growth and where do you see the problems?
The most important segment of pharmaceutical sales is the domestic market. It is very clear that this continuing to compose market is completely underpenetrated and any variable you look at can generate significantly above normal growth for the next 10 to 15 years.

Also, the profitability of this market is very high or very good given the context of capital required for the company and the company’s margin structure. Market underpenetration and expansion may still not be as good as it was 10 to 15 years ago, but it is still very, very high.

The best known fact today is that 27 crore people in India are over 50 years old. India which is considered to be one of the youngest nations in the world with a predominant young demographic profile has 27 crore of people over 50 and every year 80-90 lakh people are added to this group every year. .

This creates a huge market and with very strong brands today there are very few challenges for the current national brand business. This space continues to worsen and will likely create the greatest value for the pharmaceutical industry. The other important segment is that of export oriented companies on the brand side. Indian companies sell their brands in around 15-20 countries with their own field strength or their own brands in markets comparable to India. These are emerging market opportunities and have a profile similar to India. But the prices are better there than in India. Thus, these sections can grow 10-15% for a long time. Similar economic aspects also come into play.

The third area where the struggle has taken place in terms of US markets is where the pressures on commodity prices continue to be high in the sense that the commodity sector is not in a position to price better. generic space in the United States, but some companies have taken the plunge to enter the brand’s specialty areas. It’s an extremely difficult market, but the size of that market is much bigger and some of these companies can reach $ 1 billion with 40% contribution. This is an important opportunity and few leaders will seize it.

Finally, in India there is a very exciting opportunity in the hospitals and diagnostic service space. It is a sector that has suffered greatly from the underpenetration of insurance, the very high cost of setting up infrastructure and generally lower revenues compared to the cost of appropriate medical treatment in an expensive space. fully-fledged private sector. Covid has really made a big difference in terms of healthcare preferences, in terms of the type of money that will go into that particular sector, the need for capacity and the entire domestic hospital space is also able to price their services very well.

I think maybe this space is a result of very normalized profits towards a reasonably strong profit environment and that the demand environment is also reasonably good. There cannot be excess demand, but normal levels of income growth and whatever supports reasonably good growth. Plus, insurance penetration helps space. Thus, the private hospital space also works very well.

Finally, the new tech space or the pharmacy and online solutions space or the health tech space and I think it’s just emerged, the models haven’t been proven yet, no scale in many cases are not reached yet and I think the economy, except on the pharmacy side, I think, does not appear to be there at the moment. These are therefore spaces that we are watching.


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