Stocks to buy now: Trideep Bhattacharya sees value in these 3 pockets now

There has been some moderation, at least in the benchmark indices. In which sectors do you see value at the moment?
Trideep Bhattacharya: If we look at the markets at current levels, we see that they have been digesting various news, starting with the elections, the budget and expectations of rate cuts in the US. Now we are looking ahead to the second half of the year, the event we need to deal with is the US elections and what comes with them.

That is not asking too much of the market because if you look at elections around the world this year, there has been a significant digression compared to what was consensually expected before the elections and what the government turned out to be, the way it came to power.

In India, while policy continuity remains in place, the mandate was a little more fragile than it is today. In this context, where do we see value? Over the last three to six months, the sectors where we have added the most weight in our portfolio have been IT services and consumer. When I talk about IT services, I also include platform companies that fall under the IT or IT services group.

When I talk about consumption, I am not just talking about traditional consumer staples or FMCG, but also consumer discretionary goods and a few more. Between Modi 2.0 and Modi 3.0, the importance of consumption is likely to increase a bit, considering that there may be some populist measures that have emerged and could emerge in the future.

In the context of IT, as we get closer to a rate cut scenario in the US, some parts of IT would benefit from that because it is a globally facing industry and we have contributed to it. It may happen first in sentiment and later in the numbers, but that is another area where we think we should benefit. The third area I would point to is rate-sensitive financials, in the sense that non-bank financial companies that ultimately benefit from rate cuts globally is another area where we have contributed. So, these are the three areas where we have contributed. In terms of the areas where we have taken profits to fund them, they would be thematically popular areas, if I may call it that, like defense, and capital goods are the two areas I would point to.

We believe that the sector leadership will continue to be capital goods and that defense will continue to have a strong future going forward. But given the plethora of thematic funds that have come out in the last three to six months in the equity markets, short-term valuations look a bit higher, so we have taken some profits. So it’s a very long answer to your question, but I hope it helps to set the context.

I wanted to talk about the defence sector, especially the public sector undertakings sector. We have seen some kind of profit-taking in those sectors and we have alluded to that fact. But do you think that that kind of rise for the rest of the public sector undertakings sector, be it the railway segment or the banking index of public sector undertakings, will continue or rather continue after a pause, or do you think that they are now in the doldrums for some time now?
Trideep Bhattacharya: The way I would answer the question about SOEs is this: generally speaking, if you look at the last decade, SOEs generally had a strong valuation discount compared to their private counterparts. In the last two or three years, as the health of SOEs, thanks to the regulatory framework and also the numbers that have come out of them, has improved, this valuation discount has narrowed.

At this point, for public sector companies, the easier opportunities have already been eliminated, in the sense that the valuation discount has narrowed. From now on, public sector companies will have to take a more nuanced view as to what they do, what the competitive advantage is, and whether they can withstand private sector competition over time.

We have also made some gains from public sector companies, particularly the second-tier companies whose competitive positioning is weak, and we have added and stayed in those areas where competitive positioning is strong, such as some defence sector companies and some of the major banks in general. But from the second-tier financial companies, simply because they are public sector companies, their shares are rerated, and we have made some gains.

What is your view on the auto sector? Are you referring only to the consumer discretionary sector? I want to talk specifically about the auto sector. What is your view on the auto sector, especially the major four-wheeler manufacturers? There are also concerns about inventory build-up. Let us also talk about two-wheelers.
Trideep Bhattacharya: Overall, we are underweight the four-wheeler segment. About six months ago we were overweight, but we have reduced our weighting because we are now behind some of the supernormal growth periods resulting from COVID. Looking ahead, it is not that there is anything structurally negative in that segment, but growth rates will probably normalize over the next few years in the four-wheeler segment.

We are relatively positioned in two types of companies. One is the two-wheeler and the second are the companies exposed to the rural issue, even as far as four-wheelers are concerned. So, companies exposed to the rural economy and two-wheelers are two areas where we are positive.

What about two-wheeler companies? I think you have some exposure to them. There is also competition, especially when you talk about the electric vehicle sector. Now there is a new entrant in the stock market – the electric vehicle sector of an automaker. What is your view on the two-wheeler sector?
Trideep Bhattacharya: As far as two-wheelers are concerned, we are optimistic. We are betting on traditional business models with brands, distribution and they are getting into electric vehicles to some extent, but they have a traditional business to go with it. My view is that the pendulum with regards to electric vehicles has probably swung too far in the positive direction and now, with the arrival of alternatives like hybrids, smart hybrids, etc., it is returning to a more normalised scenario.

We expect this to happen in the next three to six months, when valuations for companies focused solely on EVs become more reasonable. As they become more reasonable, we might take a more lenient view on them. But for the time being, we have taken a more conservative view on pure EVs and have focused on those traditional business models that also have exposure to EVs, because they have the best of both worlds.

If EV sales slow down, as is happening globally, traditional offerings will gain momentum. At the same time, this gives companies with traditional business models some time to adjust their business model to reality, which is moving towards green alternatives.

There is one sector that everyone is looking at with renewed vigor and it is the new era technology sectorSome of them have made a solid comeback. What do you think about that? Do you think they have reached a fair value or is the sector still a place to avoid?
Trideep Bhattacharya: The terminology of next-generation technology needs to be defined more clearly. Platform-based companies are something that we have considered positive as long as they generate cash flows, sometimes a few years ago when they were publicly traded, but at the same time they were not generating profits. In that sense, we were not present in them.

But since they started talking about earnings and cash flows, we have increased our exposure to platform-based companies in the travel sector, the financial sector and various companies in different sectors, and we believe that this is the way forward, that this is the new-age business model in the technology sector and it is here to stay. So, our exposure to new-age companies, i.e. platform-based companies, would be between 6% and 10% of the portfolio and we believe that it is increasing.