Post this earning season, Pankaj Murarka is avoiding these sectors. Here's why

Time of India

a day ago

Pankaj Murarka
, CIO,
Renaissance Investment Managers
, believes India's equity market is overvalued, especially the top 20%, including defence and
electronic manufacturing
sectors. After a rewarding bull market, they've exited defence exposures due to unsustainably high earnings growth expectations priced into these stocks. The firm aims to reduce
valuation risk
in its portfolio at this mature stage of the economic cycle.
You have always been a fan of tech and I am not saying IT. A lot of digital platforms are combining their might and strength with consumer facing industries. Anything that is interesting to you there?
Pankaj Murarka:
We own a lot of them like Paytm. I can continue to remain long-term constructive or positive on Paytm as a growth story. We like food delivery companies and now that industry is an oligopoly. Food delivery as a segment in a few years' time will have a billion dollars cash flow and an oligopoly where the top two players will control 120% of the profits because the other players will keep losing money and it will remain in an oligopoly structure forever. Quick commerce is very quickly getting into an oligopoly structure where three or four players will eventually dominate and control 120% of the industry profit because all the other players will keep bleeding.
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So, the good thing about this internet business is that apart from fast growth, they are driving industry consolidation in the segment in which they are operating at a very rapid scale. When there are a few players, it brings in pricing power and provides a long runway for the profit pool to keep growing and that is one thing unlike in traditional industries like steel or cement which have quite a few companies.
Here there are just a few players in every segment and they will continue to dominate that space for a long period of time. The point I am making is each and every segment, or companies which emerge as leaders are the ones which we like because they will dominate the profit pool and they will have a long runway of cash flows over the next 15-20 years.
If someone does not want to buy both and buy one only, Eternal or Swiggy, do you think valuation comfort is more with Swiggy and would you even pay Rs 300 for Eternal?
Pankaj Murarka:
Both, now it is every investor's call in terms of what they like and as they say valuation after a point of time is a matter of judgment because there are too many variables going into it. But if you ask me, over a period of five years, both of them will do well.
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The other pocket you were very bullish on is the banking space. We have talked about it in the past as well. But now, given the fact that we are in a rate cut environment and even the banking companies are talking about the NIMs compression going ahead, what is your view on the banking space right now? You continue to hold HDFC, Kotak, and ICICI Bank. Any other banks that look good to you or any of your recent additions?
Pankaj Murarka:
The view on banks remains positive. NIM compression is transitory and it is cyclical by nature. Whenever we will have rate cuts obviously, the way the sector regulations or RBI has regulated the sector, your assets get repriced much faster than your liabilities because your liabilities are long duration. So, this is a cyclical thing that in a rate cut environment banks will have some NIM compression and in a rising rate environment, they will get the benefit of expansion in NIM.
I do not think that is something we should be concerned about. What we really like is banks with strong liability franchises and pristine asset quality and it is very clear now that the larger banks have an advantage over smaller banks. Clearly, we like the larger banks, and in fact, we own four of the top five large banks now in our portfolios including HDFC, ICICI, Kotak, and State Bank, and that primarily reflects our view.
One thing which has been holding the sector back apart from the cyclical issues of NIM compression is slower loan growth and probably as the economy recovers in the second half of the year, probably we will see recovery in loan growth as well in banks. More importantly, in a market which is priced to perfection, there are a lot of sectors in the markets where valuations are far ahead of fundamentals, this is one sector where valuations are very reasonable.
I still think that for an investor with a three-year time horizon, these large banks can give high teens returns or earnings growth because in an environment where credit will grow low double digit, these banks will take market share from smaller players, and they will go ahead of the industry credit growth. Effectively, they can do mid-teens credit growth and mid-teens to high-teens earnings growth and high teens returns in these banks over a medium-term time horizon.
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Post this
earning season
, are there pockets which you need to avoid or do away with from your current core list?
Pankaj Murarka:
Just to keep things in context, we need to understand that India is the most expensive equity market in the world and we are in the sixth year of a ferocious bull market. Obviously at the broad aggregate index level markets are priced to perfection and there are pockets of markets where obviously valuations are expensive or stocks are far ahead of fundamentals. What we have clearly done in our portfolio is we have taken the valuation risk out of our portfolio.
Whichever segments of the markets where we think valuations are far ahead of fundamentals, we have taken money off the table. For instance, we have exited all our defence exposures. We are happy to take money off the table because in the last three-five years, it has been pretty rewarding owning some of these stocks. But now these stocks are pricing in a high 20s, 30s kind of earnings growth for these companies over the next 10 years.
While there is earnings visibility in terms of the next two years, I am not sure in the next 10 years, these companies can do that kind of earnings growth and obviously there are a lot of expectations built into these sectors. I still doubt the long-term earnings growth can be sustained at what the market is pricing in.
The top 20% of the market is most expensive and this includes defence and some of the other companies across electronic manufacturing. We have taken that out of our portfolio because we want our portfolios to be reasonably priced and at a mature stage of economic cycle and bull market, we do not want to carry valuation risk in our portfolios.
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