Stock Picks: Dhiraj Relli Talks Long-Term Themes That Can Generate Solid Returns

“We have seen such cycles in the 2003-2008 period as well. I think that higher capacity utilization, availability of credit and also decisive demand coming from the market, visibility of decisive demand are the factors that will lead to a significant increase in demand.” private capital expenditure“says Dhiraj Relli, Managing Director and CEO, HDFC Securities.

I assume that in your day-to-day activity, you must be meeting a lot of companies of all shapes and sizes. There are now reports coming from the Reserve Bank of India that in FY25, expectations are that private capital expenditure may also start picking up. So far, over the last few years, we have seen that most of the heavy lifting and capital formation has been done by state-owned companies and the government. Are you seeing early signs of that? Are these kinds of things coming up in your conversations as well?
Dhiraj Relli: Of course. If we look at the issue of capital expenditure, you have rightly said that most of the heavy lifting has been done by the government and capital expenditure led solely by the government. And we have been talking about private sector capital expenditure having already lagged. I think it is high time that we see more and more private sector capital expenditure. We have seen these kinds of cycles going on between 2003 and 2008. I think higher capacity utilisation, availability of credit and also decisive demand coming from the market, visibility of decisive demand are the factors that will lead to significant private capital expenditure.

But what is the best way to play it? Because if we look at industrials, like… TISSUE, Siemenshave gone up considerably. L&T is also not cheap by any means. Other parts of the entire industrial vertical, be it infrastructure, wires and cables, etc., have also seen pretty good movement. So, what is the best way to trade in the sector right now?
Dhiraj Relli: You are absolutely right, valuations are really stretched for the entire space, including the industrial sector. If you look at it, they are even higher than the valuation levels of 2007-2008. So, my view is that you have to be very selective and cautious here when you are looking at a short-term bet. But in the long term, I think it will not be a one- or two-year development, so it is a long-term theme that will play out. So, if you do a bottom-up analysis, Stock selectionYou will see these spaces.

Believe real estate sector It has also worked well and we are seeing more and more green shoots there as well. So, building materials is one area, industry is another area, construction is another area where we are seeing some of the opportunities.

Do you have any thoughts on this broader narrative that the broader market is actually expensive because the other part of the people, a lot of professionals we talk to, say there’s merit in the broader market activity because that’s also where the profits are happening, the balance sheet improvement, all of that, so it’s obvious if the money is actually going in that direction? What’s your stance on that argument?
Dhiraj Relli: I think it’s the opposite. Unfortunately, domestic liquidity is looking more at thematic funds, thematic options, as well as more at mid-caps and small-caps rather than large-caps. Undoubtedly, market pundits have been saying that there is value in large-caps, but we are still seeing liquidity increasingly flowing into mid-caps and small-caps and that’s where we see some stretching in valuations.

And we have seen that in the last few sessions there have been significant corrections in public sector and defence companies and where there was froth in terms of valuations, which may not have been fully corrected, but liquidity continues to haunt mid-cap and small-cap companies.
But I just wanted to ask you if someone were to put additional money to work, what are the themes or what are the sectors where you think the risk-reward ratio is still a little bit more favorable?
Dhiraj Relli: I will answer this question in two parts. If you really are a long term investorThere are a few themes that are developing. I think the formalisation of the economy, the financialisation of savings, the energy transition, the issue of capital expenditure and also digitalisation. These are the long-term themes in which you can invest with a horizon of five to ten years and this will develop and offer superlative results for investors.

But if we look at the sectors we can bet on, my view is that the big banks, where we still have opportunities, the banks have not participated in the rally of the last few years, we are still seeing value in the big banks and at the same time I am saying that we should avoid the small banks.

The big banks, both private sector and public sector, we still have a valuation comfort there and the valuations are actually lower than the long-term average valuations here if you look at price to book or if you look at how they are growing in terms of profitability and top line, we all know that credit growth has been strong and we just talked about the capex opportunity, I think this will play out very well for the big banks and we are also seeing a recovery in the consumer staples and also durable goods.

With green shoots coming from rural markets with a good monsoon and with more initiatives taken by the government in the budget to boost the rural economy, I think we are seeing more upside in the consumer durables sector as well as in the consumer staples sector.

I just mentioned that the real estate sector has performed well. I think they had an exceptional quarter in the last quarter. We still see this picking up after many years and this trend may continue for some time and again. Building materials is one area where benefits will be seen with the delay.

Now, in recent years people have been buying larger homes, renovating them and doing interior renovations, so that’s where we’ll see a significant improvement.

Do you have any idea how sectors that are related to what is happening in global macroeconomies, such as metals, for example, performed well? What do you think about that?
Dhiraj Relli: Believe metal It’s very much a global game and what we’re seeing is that China is going through a transition and that may have a spillover impact on the broader global market, so that’s where there’s still uncertainty about the metal part.

We are seeing a structural shift in demand from China and a downward trend in demand from that country. In fact, that has also contributed to the fact that crude oil prices have not been allowed to rise, although in India we have seen decent growth in crude oil consumption, but there is a decisive downward trend in crude oil consumption even in China.

So it has more to do with global demand than domestic demand. In fact, in India, input prices have been lower and some sectors have benefited from that, although incomes have not grown, but incomes have grown well in the last few years.

What about oil and gas? I mean, ONGC, Oil in Indiathe rest of the energy package, including Gailetc. have been booming lately, even OMCs. Do you think they are no more or should you continue investing in these names?
Dhiraj Relli: I think they are in an overheat zone. So, my view is that oil and gas can be avoided at this stage and though the refinery gross margins are also more or less 3% to 5% only, but the overall global demands are not growing, though the Indian demand has been steady, so I don’t see any significant uptick from the current levels. In any case, we have seen all these stocks performing well in the last few sessions only.

What do you think about the value part of the whole consumer basket, the value retailers, for example, the footwear companies? Basically, so far, the top end of the pyramid has been the subject of premiumisation, but with the gradual return of the base of the pyramid, for example, rural areas, Tiers II and III, do you think that the lower end of the pyramid, also represented by the categories, can start to come back? Is there a case for that?
Dhiraj Relli: I think what we are seeing in the Indian ecosystem is a structural shift in the propensity to consume and save less, which is also reflected in lower deposits, so that is where we are seeing more and more discretionary spending, and discretionary spending has led to premiumisation in most industries. Now is the time when we will see volume growth because of this discretionary spending.