Manish Sonthalia, CIO, Emkay Investment Managers, discusses the gut-wrenching fall in the market and the consequent recovery to new highs. Coming to investment opportunities, apart from Zomato which is in consumer tech or fintech, he expects CDMO which is pharma contract manufacturing to do well. He also expects that traditional ICE engine companies will make a comeback despite the excitement in the EV space. Further, Sonthalia expects capital goods stocks, power and power transmission ecosystem will do well and SaaS will do well and traditional IT services will take a backseat.
I think regulation changes in terms of the fact that a liquidity analysis report needs to be submitted on a monthly basis, was the major reason. You would remember that in 2018, when there was a reclassification into largecap, midcap and smallcap and there was a capital gains tax that was introduced at that point in time, at that point in time also we saw some gut-wrenching fall in the equity market.So, this time around, when the first analysis of the liquidity test happened, it did not seem to be that big a problem from the entire mutual fund and that is why you saw a knee-jerk reaction and then a rise thereafter. I think this process is going to be on. Illiquid midcaps are no longer going to be favoured as far as the mutual fund industry is concerned. They would find place more in the alternate space and liquid midcaps would come back into the reckoning.So, these would be the primary reasons why we actually saw a fall. It was overdue in some sense that some segments of the market were frothy in the broader markets and that led to a correction sort of you could say. But I would in general believe that the markets are not very expensive.Markets in general, on the benchmark, are not very expensive. It is a given. Coming to the theme, I would believe that it is all about the investment theme going forward. It is all about the order book. We are not going to see the earnings come through just yet. It is going to be back-ended and that is why near-term valuations look slightly expensive. Some of them are trading at FMCG valuations. So, it is a pick and choose within that space.But it is all about the power sector, infra, capital goods and being somewhat positive on pharma per se. But on a broad-brush basis, banks are going to see earnings-led growth. So, see, these are some of the themes which are going to be in the limelight and within that, you got to pick within the broader markets as well as the largecap space. That is how we are placed. It is individual stock picking within the overall broad themes that I just talked about.I do not want to talk about specific stocks, but just about this holding that we have in the portfolio. It is about what sort of EPS this company is going to clock maybe in 2026. And I think broadly the Street is working with 2,500, 3,000 crores worth of profits. But I think it is likely to be surprised, more so on account of Blinkit. Food delivery is going to do its bit in terms of contribution margins and EBITDA margins, but Zomato is going to surprise you on the Blinkit side. So, that is the broad thesis. Rs 2,500-3,000 crore of profits is what the Street is working with. The numbers would surprise.CDMO companies could surprise you on the positive side because of the innovators actually moving away from China and of course, on a three-year basis. All platform companies, capital market-related themes in any case are doing quite well and these are all platformized, which means there is an element of nonlinearity that is going to come through. Companies which are associated with artificial intelligence behemoths, these could actually surprise you very positively. ICE, which is internal combustion engines, which was written off completely, they could surprise you on the positive side.We have already seen many of the ICE names come back in a big way, very silently as opposed to batteries which were the talk of the town. We would see what Apple talks about when it comes to the electric programme and all of that, so that is one area. Of course, it is going to be capital goods. It is going to be power-related sectors. The amount of investments that are going to go into this space, if India has to achieve that $6-7 trillion worth of economy in the next five-six years. The sky’s the limit and we as fund managers, analysts, will try to figure out where the valuations are.It is going to be like the consumption-related themes between 2010 and 2020 where everything shot through the roof and the valuations really did not make too much sense. But as the earnings would have come back ended because the theme was in limelight, something similar is going to happen in the investment-related themes, the capital goods, the infra, the power, the entire value chain that is going to be significantly outperforming in the next five-seven years.Valuations are one thing one needs to be very careful about. Here also how we look at valuations is basically where the visibility is going to be the best. You have a five-seven-year theme, but if the next three years are going to be very visible in terms of the execution capabilities and what they are talking about and whether they can do it or not, that is going to command a premium. Whereas if the execution is fuzzy and it is all about the order book position, then it is going to be slightly on the neutral side.One more disruption is coming through and that is in the IT space because artificial intelligence is going to rule the roost and the traditional Indian IT companies, the time and material (4:56) way you are going to require a lesser number of people.Of course, it is a services business. It is not going to go defunct or the business is not going to go away totally. Valuations have come off, but this whole hiring thing, where lesser numbers of people are going to be required and if the efficiency gains are not translating into billings on Indian IT vendors, then there is a problem even in the IT space.The business model is going to change significantly. We need to keep a tab on what is happening in the AI front because that is where the entire crux would lie. And, of course, business models need to be changed and India is going to participate in artificial intelligence through the making of applications for the rest of the world. But, it is a journey and one needs to be prepared for that.Well, intelligence is going to do well. Anything centred around data centres, the power of computing, that is likely to do well. Time and material and obviously, software as a service is basically something which is minus time and material is likely to do much better.See, the thing is that the business is not going to go away. But businesses which can actually tweak their business model in such a way that they are able to capitalise on the lesser number of people and outcome-based pricing and incorporate artificial intelligence into their model are likely to do much better.It is a multi-year theme, but between now and the election results, things are in a slowdown mode. Fresh orders may be slow to come by and execution is likely to get accelerated post the new government coming into power in the first hundred days. So, the theme stands good, but as far as your outcome on the markets between now and election results, it is going to be a sideways sort of a market, not too much to be expected, on the benchmark indices, maybe plus-minus 5%, but the broader market is likely to see a churn.Stocks’ illiquidity is a factor that is going to take a backseat and midcap, smallcap which are quite liquid are likely to see some heightened action and, of course, within that space you could have a logical conclusion that PSUs will be in the limelight because these are very liquid names. You do not have liquidity names in the broader markets when mutual funds are likely to churn their portfolios. So, a lot of churn in the broader market, broadly plus-minus 5% till the election results.
