As currency stability improves and interest rates are expected to fall, the industrial sector will become more attractive, especially for exporters competing with China. Over the next twenty years, the benefits of the China Plus One strategy are likely to increase, requiring a closer look at exporters from various sectors.
What is clear when it comes to pharma as India is known as the pharmacy of the world, do you still prefer traditional pharma companies or now focus on the CDMO side? Maybe that’s the segment where we need to show the metal?
Rahul Chadha: There are opportunities in both traditional pharma, CDMOs and hospitals. Hospitals are names in which we have invested. For the last five-six years, they have performed well and taken a breather for a few quarters, but the demand story is secular. Look at the number of diabetic patients, cancer patients in India, it is a huge number.
Again, people tend to pay insurance companies better. Hospitals are there. For pharma, the story is that in the past, we’ve seen significant declines in generic drug prices in the US, which is not happening. There is limited capacity and many of these pharma companies are smart, so there is talk of some of them going into the GLP-1 opportunity in the next two-three years in markets like Canada etc.
These may be additional triggers for pharma companies. These are good, secular growth stories. Again, one should be careful about valuation. One should be aware of the fact that the companies one invests in do not have significant one-offs or ride on significant one-off opportunities, so it comes there.
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Everyone is betting on America, but Rahul Chadha is investing in China and India. Here’s why
Finally, to your point on contract manufacturing, China Plus One is real. If you are a buyer, you will not buy 80% or 70% of your needs from one supplier. Unfortunately, the experience with China was so abysmal that most customers did the same.
But now, when geopolitical risks come to the fore, they will diversify and thereby benefit Indian companies. One thing to watch out for is that prices may be affected initially as there will be competition.
How much of the whole premium usage story has already played out? In all categories, be it auto, real estate, FMCG, retail, what makes more sense to have exposure to a core portfolio? Will the alpha generation come from rural plays because that’s the valuation comfort?
Rahul Chadha: What will happen is that premium consumption categories, such as travel, will continue to do well. Everyone wants to travel abroad and there is a wealth effect and a tendency to do so. So, hotels and things like MakeMyTrip, etc., are big beneficiaries. We have seen some breathing in premium consumption, but some categories like jewelery have done well.
On your point on rural-economy plays, that is something that has been waiting for. Post-Covid, inflationary pressures have eased and incomes have improved, the economy has improved. So, hopefully some of these two-wheelers or consumer staples do well in the coming quarters.
The FMCG index has given flat returns in the last one year. The private banking space has delivered flat returns. But if FIIs continue to sell, will they give any returns as a large portion of the market is still dominated by FIIs. HDFC Bank may be cheap, but it can stay cheap. HUL is expensive and may remain so for a long time. My concern is that if FIIs continue to sell, the supply will become unregulated.
Rahul Chadha: I would have a different take on banks. The basic thing we are discussing is that six months from now, you will see that these outflows will turn into inflows and valuations for banks will become attractive again. Globally, if you look, banks have done well because there is a reflation trade. A good thing for banks is that inflation is high.
Sumit Poddar is on 3 sectors likely to rebound in 2025
Look at the performance of Bank of America, US Bank, Citigroup etc. They have performed exceptionally well. Same with Hong Kong banks, NIMs are back, credit growth is back. So, there is no reason why it should not happen in India. There was a pain over the last one year that came because unsecured credit was down, as it were, controlled, which affected NIMs, which affected delinquency, I think it will stop in a couple of quarters.
For companies like Hindustan Unilever, the issues are different. It’s an issue that new groups of customers may not identify with those companies. We are seeing huge competition from new companies, personal cosmetics etc. Look at the growth new companies are getting thanks to Hindustan Unilever. Those are the business issues you have to look at. Consumer stocks like Asian Paints have more competitive intensity than anything else. They are more company or sector specific issues.
Which big structural stories will stick when it comes to India? Any sectors or stocks?
Rahul Chadha: Apart from what we discussed, this whole production, this whole industrialization, this whole investment in power capex is a real story. We’re seeing it globally, the demand for power and infrastructure rollout has improved significantly and outside of China many countries haven’t invested in the space for the last 10 years, so it’s something that everyone wants to buy on the decline.
As the currency stabilizes, the economy stabilizes, rates fall, industrials become an attractive story and then exporters. Many of these exporters are facing competition from China and their collections have been affected. But over the next two decades we will see more and more benefits coming from China Plus One. Therefore, exporters in each category need to be looked at.
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