Jyotivardhan Jaipuria on where to put money on the table and where to take it off

Time of India

a day ago

Other than banks and financials,
Jyotivardhan Jaipuria
,
Founder & MD, V
alentis Advisors,
favours the Chemical sector which is gaining attention due to low dealer stocking levels. Cement sector is expected to benefit from consolidation and government demand. Pharma, especially CDMO, shows growth potential. US generics are attractive on corrections. Small and mid-caps offer stronger earnings growth, but valuation is key. Liquidity will drive earnings for small and mid-caps.
The increase in the excise duty by the Maharashtra government has come as a bit of a shocker for the consumers and for alcobev companies as well. It is the highest ever hike that we have seen since 2011 on Indian made foreign liquor (IMFL), it is in the range of 50% to 60% which is likely to lead to an MRP hike of almost 30% to 50% for the brands. How do you see the alcobev pack playing out because analysts were getting incrementally bullish on the consumer discretionary, especially the alcobev part. How will this shape up now?
Jyotivardhan Jaipuria:
We do not own these stocks and that has been one of our concerns that all of these are very dependent on government policies and it is dependent on each state and very often the states keep changing duties and so that is what starts affecting the demand. If I look at a very macro picture what we have to remember is lot of states are struggling for revenue and when they are struggling for revenue because of the subsidies they have given or the election promises they have given, stuff like alcohol becomes one very easy target from where they can raise avenues because it is treated as this is for the rich people, it is not for the poor people and that has been our concern really that it is very difficult to keep forecasting what each state does over here. We generally stayed away from this pack. This is going to be negative for demand for the sector.
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Before we discuss more of your
sectoral bets
, I want to get your broader view on the market. We are at an 8-month high when it comes to the
Nifty
. The last time we saw this level was in October. What are your expectations going forward in the next 6 to 12 months? What are the key factors we should be watching out for especially in terms of global cues?
Jyotivardhan Jaipuria:
Yes, you are right, what we are seeing is like the market has recovered from its lows. The one good thing for us has been India's macros are looking very good. If you think of the twin deficit, that is looking great; inflation is coming down, especially held by oil prices going down; RBI has been very proactive on the monetary policy front. We have a very easy liquidity.
Already they have probably pumped in Rs 6-7 lakh crores of liquidity. The macro is looking very good and that is helping us. The valuations are not cheap. Earnings hopefully will recover. We saw some recovery in the March quarter, but still it was like we are still running at less than single digit returns. So, hopefully, this year we will have the forecast of 10% to 11% growth which helps us drive returns.
Overall, the concern is global. Basically the deadline of 90 days for the Trump tariffs gets over on the 9th of July and so far, not many deals have got signed. Even India's deal is still a work in process. We do not know whether he puts the reciprocal tariffs back again or if he will go back and say that he will give another 90 days or 60 days for negotiation to happen and so that is one thing which weighs on the market. One positive for the market to the later part of this year and for the Indian market is that MSCI does this review and Korea is up for review again, and whether they will move to a developed status.
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If that happens, it will be very positive for all the other countries in the emerging market space. India's weightage will probably go up roughly 2% because of that and that will help get flows to the Indian market, so that is a positive from the global which we have to keep an eye on by the end of this month.
Let us talk about the sectors then. While there is a common consensus on the banking pack, the NBFCs and the financials, even the valuations look very reasonable. But what are the other sectors that you would be bullish on and what are the bets where you would be taking money off the table? What are the risks that you see in the coming future?
Jyotivardhan Jaipuria:
Yes, you are right, we also are positive on banks and financials. More or less everybody has turned positive on it. Apart from that, one other sector we are bullish on. Just remember we generally do not go by what is current momentum but what is out of favour, so we have a whole 3 U philosophy which looks at sectors which are under-owned and under-performing.
One sector which we have been playing now has been the chemical sector, and that has been out of favour for quite some time. The stocks have not done well for the last two years and there are some interesting ideas which are coming up there, especially because globally, a lot of dealers have destocked chemicals. The stocking level at the dealer-end is close to a two-year low and that is where we see some upside coming through in demand.
Here we have to be careful because stocks are still not cheap. So, look for stocks where there is a substantial earnings growth upside over the next two years. But in general, chemicals is one sector we like.
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The other sector which we like is the cement sector. Cement has not done much in terms of earnings growth, and has been flattish for the last 12-18 months.
There has been a lot of consolidation in the sector which probably helps over the next couple of years because it becomes easier to hike prices. Second, government demand should pick up and so for us, there are a lot of interesting ideas to find there. We are getting into the monsoon season which is typically like a lean season for cement. Over the next few weeks, pick up cement stocks on dips. So, those would be two sectors we like. We also like pharmaceuticals, but there we have to be a little careful with Trump's tariffs because there has been a lot of contradictory talk from him. So, be a little careful there. These are very secular growth stories, especially the CDMO pack in the pharma space.
Within the pharma space, are there any particular pockets where you find more value than the others?
Jyotivardhan Jaipuria:
Yes, one of them is the CDMO space where value is not there in the sense these stocks are not cheap and are rather expensive. But for us, over the next three-five years there is lot of visible growth there and so just the sheer growth which we have most companies there could have a growth compounded for the next maybe three-five years or in the range of 25% plus, so that is what is really probably going to drive earnings in the space.
None of these stocks are very cheap, so when we look at it, we always think that the valuations have a lot of margin of safety probably, but we are quite confident that the earnings will play out and so that is what we are playing. Now, there are obviously two other spaces in the pharma space, one is domestic pharma and the other is the US generics or in general the global generics. So, we have actually been more positive on the US generic side than on the domestic pharma side because US generics had done quite poorly for four-five years and for us, we were sensing a turnaround.
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We have been playing US generics for the past 18 months, and that is where there could be a lot of wobble if Trump changes some duties there. But for us, the duties will create temporary dislocation. But Indian generics are really cheap. There would not be a longer-term impact. At some point, the consumer prices in the US will probably go up to reflect the duty changes. So, we would be bullish on US generics on any correction and we like the CDMO space.
After the correction that we have seen in the SMIDs, are you comfortable with the valuations? As far as the smallcaps are concerned, there could be an improvement in the earnings growth going ahead. Do you see comfort in buying into smallcaps or would you still be wary of the broader market?
Jyotivardhan Jaipuria:
When we started the calendar year, it was a very easy call that the largecaps will do better than the smallcaps because that time the valuation disparity was huge. After the correction that we saw in January-February, we became more neutralish. In fact, the tilt became slightly more towards the small and midcaps because like you said the earnings are much stronger for the small and midcaps.
Even in the last quarter, the earnings growth for the midcaps was close to 17-18%, the earnings growth for the smallcaps was just about double digit and the earnings growth for the largecaps was more like 5-6%. So, the earnings growth will be sharp and with liquidity coming into the system, earnings growth this year will surprise on the upside for the small and midcap which will drive earnings.
At the same time, one should be careful of being a very blanket call because there are a lot of pockets in the small and midcap which are not very cheap. You have to look at valuations a little more closely because this is not like a runaway which we saw post Covid where every smallcap was flying. I would be a little more positive on the smallcaps but be careful of the valuations and look for stocks with earnings visibility.
I want to get your overall view on SMIDs. Last time we spoke, you said the next leg of growth is going to be driven by earnings and just before you were mentioning all the sectors that you prefer, they have an earnings upside. Last time you said that 12% recovery in FY26 is what you expect in terms of earnings. Do you still retain that view or has it changed and what is the outlook there? Which are the sectors that are going to drive this growth?
Jyotivardhan Jaipuria
: We still retain that view that we will get double-digit earnings growth for FY26. As you know, FY25 was a very weak year for earnings, so one is probably the base impact helps and what you will see over the next six months is like a very poor base of government and corporate capex. It will be easier to show growth for a lot of these companies which are dependent on government capex.
The other thing that will help is liquidity in the system. Rates are coming down, and that will be very positive for earnings to come through. In terms of, what will help, basically, we will see some of the engineering names and the capital good names continue to do well. Some of the consumer discretionary names will also show strong earnings growth. We will probably see a rebound in some of these commodities, like cement which will play an important role in terms of driving the earnings growth for next year, plus stuff like telecom.