Daily Voice | Managements across the economy’s core are extremely optimistic, helped by strong earnings, says this fund manager

According to Naveen Chandramohan, founder and fund manager of ITUS Capital, executives in all core sectors of the economy are extremely bullish, supported by strong gains in infrastructure, autos and capital goods.

Naveen, with over 16 years of experience in the financial markets, has claimed that car accessories (particularly around B2B manufacturing) is a theme that has a significant (3 year) trajectory ahead of growth. “It certainly looks attractive to me as the growth is sticky (B2B driven),” he says in an interview with Moneycontrol.

He thinks the market is pricing in a Fed rate cut in 2HCY 2023. “It’s an environment that’s very different from what we saw in mid-2022.” Excerpts from the discussion:

It’s interesting to get some context for why multiple funds and mutual funds have shifted their focus to new-age tech companies that have found their way into many portfolios — Zomato, Paytm, and Nykaa are the ones that investors have in many portfolios today would find. 2022 has been a year in which the terminal value of companies has been reset – this is happening due to the change in interest rate regime along with a global liquidity tightening environment.

In September 2022 the market had a changed structure. It started with the UK gilt market running out of liquidity, prompting a shift in attitude from central banks around the world. The UK central bank had to step in and provide liquidity, and since then the Fed has focused on making sure bank reserves did not run dry. Asian central banks, notably the BOJ and China, eased by injecting a combined $1 trillion into the system (you can watch Japanese stocks perform since then) and things have been very different since then.

Today, the market is discounting a Fed rate cut in 2HCY 2023 – it’s an environment very different from what we saw in mid-2022. Currently the market is pricing in a futures re-rating (with lower interest rates) and this has benefited the macro of high growth companies worldwide.

In India, this has also benefited all new age tech companies in their valuation discounting. They’ve been overly focused on buzzwords like “adjusted EBITDA” for their earnings, which leads me to learn new aspects of investing. My view of them doesn’t change – their business model needs to be clear about how they generate cash flows, and I don’t see that.

An investor can certainly make healthy returns in the short term, but I see no benefit. In full disclosure, we had an investment in Nykaa but exited last year as capital allocation differed significantly from our expectations and was in areas that we believe were suboptimal for future excess returns.

With the gradual uptrend in IT, do you expect momentum in IT stocks to increase in the coming weeks?

We do not invest in uptrends or exit on downtrends. We invest in companies whose valuations show little downside, even though we are wrong. We also don’t invest with a term of weeks – that’s trading.

In terms of IT, as I mentioned above, when the end value changes, IT also benefits. However, it’s important to remember that amid a recession and a hard landing in the US, IT took a price hit. So far, the demand cycle of projects has not affected company earnings.

In fact, the larger companies have reported better earnings and order books due to the consolidation of projects. Ratings will be downgraded by the end of 2022 and we’re reverting to the mean. From here, I believe IT company returns will be a function of earnings growth for investors.

Have you seen any major downgrades after December’s quarterly earnings in fiscal 23?

Consumer companies – the narrative went into earnings season strong and valuations were high. Many of the consumer staples companies posted strong gains, but on a much higher basis. I see a healthy correction in them as a good thing in the market as valuations correct a bit. Now it’s not a big downgrade because consumption in our country should keep growing.

What message do you get from the management commentary following the quarterly results?

Management in every core part of the economy is extremely bullish, and this is backed up by strong earnings, namely in infrastructure, autos, capital goods – every economy that faces the business.

Exports have slowed in certain areas, but it is important to understand that we are coming from a high base, so interpreting significantly from a quarter is not correct. The only area that lacklustered compared to expectations was QSR (fast food restaurant).

Do you think the market has priced in the Adani Group’s problem? Are These Stocks Still Overvalued?

As you know, Adani has 6-7 large companies that have built significant market capitalization over the last 6 years. Many of these companies have scaled their market caps around debt levels that are difficult to manage and sustain. If you look at the systemic risk across companies and who owned the equity of the Adani groups

a) More than 90 percent of Adani’s debt was issued in the form of $ bonds (funded offshore by USD investors).

b) The Indian banking system has very little exposure to the group – limited to working capital shielded by secured assets

c) The risk of infection of the system was low

d) The domestic mutual funds in India have also not owned shares of Adani companies.

We wouldn’t own companies with this level of debt, but Adani Ports’ bonds look attractive as they are backed by real cash flows. Have all the headlines been discounted, I’m not entirely sure. Mood takes at least 1-2 quarters to change completely unless the group’s action is different (so it’s faster).

Do you expect the RBI to start cutting rates in early 2024 as most pundits expect no rate cut for the rest of the current calendar year?

I don’t expect the RBI to cut – no. This would change if there is a global liquidity problem, but I expect inflation to be structural.

Which sectors currently appear undervalued and should be bought?

I have argued that car accessories (particularly around B2B manufacturing) is a theme that has a significant (3 year) trajectory ahead of growth and this certainly strikes me as attractive as growth is sticky (B2B driven ).

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