What is your view on some of these new-age consumption companies. We have seen numbers coming in from Nykaa and Honasa Consumer. There are categories like BPC, fashion, all of them have been doing better compared to the traditional staples categories. What do you think lies ahead for overall consumption given that the festive and wedding season is coming? Where do you think the new-age consumption names are heading from here?
Pratik Gupta: Firstly, on the broader consumption space, there is no doubt that we will likely see a better second half of this year. Typically, it has a seasonal uptick. You have the festive season and this year the monsoon has been good. Rural demand should be good and that is there. But the main question to ask is how much of that is priced in and that is the problem with a lot of consumer companies which are trading anywhere between 40 times and 60 times one year forward earnings. And that’s why we would rather play companies where sustainably on a longer-term basis, apart from the cyclical second half seasonal uptake, we will see continued sustainable growth in the years ahead and usually these consumer tech companies like some of the ones you mentioned are gaining market share.
These companies are pulling further away from some of the weaker competitors in this slow economic environment. Again, we are looking for category leaders. Even within the consumer sector, look at these consumer tech companies which are category leaders. Companies like Nykaa, Honasa are pulling further away from some of the weaker competitors. But again, the next one or two quarters are still going to be somewhat tough. Valuations are elevated. Do not expect any dramatic returns from their stocks in the near term. But on a three- to five-year basis, if you are willing to wait that long, these are the stocks we would like.
But Kotak as a firm always comes out with a very nice one liner or the header if I may call it. I am not sure whether you are the mastermind behind it. If you really have to sum up the market condition right now and advise in one line, what will that be?
Pratik Gupta: What I would say right now is we are going through a very uncertain global economic environment. Therefore, again, I would say do not try to be a hero, do not try and hit a six in these markets. This is a time to preserve your capital. Make sure you get a return of your capital rather than focusing on return on capital. So, be somewhat cautious. It is okay if you do not get the multibagger or whatever. Investing in equities is a very long-term game.
When you are going through a very rough patch…, things may get worse. If for whatever reason, the tariff situation with the US does not work out, our GDP could go down by 60-70 bps. We could fall well below 6% real GDP growth this year. For the next one, one-and-a-half years we could be in for a very tough economic patch. So, do not try to be a hero. Be cautious. This is not the environment where the market environment is going to be supportive of a very bullish sort of environment where almost every stock does very well. So, focus more on quality, do your homework, and be very careful right now.
The valuations in some pockets have come down. Case in point being banks after their Q1 earnings, the valuations have come down. Do you believe the corrections that we have seen overall and the earnings rerating that you are indicating, is attractive enough to be an entry point for some of the foreign flows to come in because on the FII front barring one or two sessions, that also largely on the back of block deals. All we have seen is a continuous selling streak. Do you believe the market post this earning season is looking attractive for a fresh buy or do you think there could be other factors at play?
Pratik Gupta: So that is a great question. As far as foreign institutional investors are concerned, there are a couple of things going on in their mind. Firstly, India is by and large, most global investors are somewhat underweight India and in fact very negative on India given the growth outlook. Growth has slowed down quite sharply. As I mentioned, we are looking at just 10% earnings growth for the Nifty this year, which is quite low for the elevated valuations which India trades at. Keep in mind the Indian index is up only about 6-7% this year versus the MSCI EM index which is up about 16-17% this calendar year and to put that in context markets like Korea have grown by 34-35%, Mexico and Brazil have grown by 15-17% this year. So, India is underperforming. But despite that, they are still not very attracted to India. If anything, as you rightly mentioned, we are continuing to see outflows from India. When we speak to a lot of our global clients, they are still not very interested in India mainly because of the weak earnings growth outlook, the high valuations, and the tariff related uncertainty. We think it will take some more time. Either we get clarity on the growth outlook or our valuations correct a bit more. We could go through a time correction. The other trigger could have nothing to do with India but rather what is going on globally with the US. If the Fed cuts rates, you could see dollar weakness and that in turn could trigger inflows into EM equity funds, which in turn would lead to India getting its own share. Perhaps we could see geopolitical events like perhaps Trump and Putin striking a deal, a global risk-on rally and again money coming back into global equities and India getting its fair share. But India on a standalone basis as of right now is still not attractive enough for the foreigners and that is unlikely to change for the next few months, the way things are going.
Since everything is so tactical and myopic in nature right now, what about earnings from cement and chemicals? Do you think there were any positive surprises there?
Pratik Gupta: Yes, there have been some. Cement in particular has done somewhat better than expected, but again there is a lot of capacity addition coming through; every major cement company is increasing capacity by 6-8% per annum. Demand is more or less keeping pace and here the other problem is the real estate sector might seem to be showing signs of slowing down, so that is a bit of a worrying sign.
But on the positive side, the second half government capex is likely to kick in post September-October. Again over here, coming to valuations, most cement stocks are trading at very expensive valuations. Generally for the last six to nine months, we have been somewhat cautious on cement stocks. In chemicals, there is another problem, which is competition from China as well as the tariff related uncertainty. So, we have been extremely negative on chemicals as a space, not just now but for the last two years and that call has largely worked out and even now most of these stocks are trading at anywhere between 25 and 40 times. There is a lot of capex going through. The demand visibility is quite poor and there is uncertainty about the competition from China. So, we would definitely avoid chemicals.
Cement is a bit more cyclical and you have to time your purchases. This is a commodity business. You go through periods of extreme weakness in demand and that is when you get a little bit of undervaluation and that is when you sort of jump into these stocks, but not at this point in time. Right now, we would stay away from both these sectors.
