Market: Weak earnings indicate no market breakout anytime soon, warns Madanagopal Ramu

Well, overall, this earnings season hasn’t started on a good note and I think that’s part of the reason why the market is sideways. Apart from the fact that the exodus and departures from FII actually continue. What do you think will be the trigger for the market to turn around and head towards that 26,000 mark?
Madanagopal Ramu: Look, we have been writing even six months ago that earnings have started to disappoint at the top level even much earlier. The fact that we had some tailwinds in commodities in the last two quarters of FY24 was better, but the first quarter of FY25 was weaker and the second quarter is much weaker and I think these tailwinds Margin tail will also continue to disappear in the second half of this year.

Therefore, you should also be prepared for some disappointments in the future. So, that will keep the market in a narrow band. If you look at the overall level of the index, I don’t think you can see a breakout any time soon.

If you’re investing in large-cap companies, you should probably be happy with 10% to 12% earnings growth and a similar type of profitability. If you are in a mid and small cap company, if you can choose the right option stocksHigh growth sectors can still be found in India.

If you invest in high-growth sectors, you can expect 20% earnings growth. But if you’re going to be a diversified investor with a lot of mid- and small-cap companies, then you should be prepared for earnings disappointment in that space as well.

So, generally speaking, what I’m seeing is a very high share of earnings growth, which was primarily contributed by the raw materials tailwind last year. It’s disappearing. And now earnings growth should be skewed towards a few sectors and few stocks, so it’s something to be prepared for. What are these few sectors and few stocks where earnings would be skewed and where growth of more than 20% is being seen?
Madanagopal Ramu: Look, we believe that India remains a growing country and when growth occurs, certain traditional sectors may not contribute to growth the way they have in the past.
So if we look from here over the next 5 to 10 year period, you can really bet on sectors that are in the financial space, consumer discretionary and e-commerce space and then these are the areas where you need to spend further.

In fact, manufacturing has gained momentum in India. There are specific sectors within manufacturing that you can focus on. So we think that generally speaking, if you’re in the energy space within manufacturing, in the consumer space, if you’re in travel, entertainment, QSR, hospitality, retail organization, these types of areas are going to look like interesting.

Within the financial space, it should be more geared towards retail, particularly low-cost NBFC type areas. I think these are areas where the growth will be substantially better than what you can get from a large cap Nifty.
So these are the areas that we focus on and that we actually see as an extension of PEs. So wherever PEs are very active and really investing, these are areas that we also spend a lot of time understanding and investing in.

You are positive when it comes to the consumer and manufacturing space. These are the pockets you are looking at. But what other spaces would you recommend staying away from because I’m just looking at some of the notes and you say you’re not that enthusiastic about oil, gas and energy, both topics that have done very, very well on their own over the last few 12 to 24 months. Is it just the ratings that are keeping you away or is there some fundamental change here?
Madanagopal Ramu: So, actually, we are positive about power. I think if you look at our holdings, we have enough exposure to both renewable energy and even thermal energy. Have BEL just as we have Premier Energieswhich is an actor in solar space. And we also have exposure to the broadcast and distribution space. Overall, we are very positive about energy as a space because over the last four or five years, the energy sector has not received enough investment.

And now, because of the energy. demand On the rise, I think energy is a sector that can also play as a structural element over the next three or four years. We do not see this time that the cycle is short-term or ends much earlier than what happened in the last cycle.

We think the energy sector is definitely an area where you can really buy the dips and there is a real story to develop because the competition is less in that space as well.

But if you look at oil and gas, we have never been very positive. We feel that little by little as a country and globally we are going to move towards renewable energies. Also in mobility we are moving towards electric vehicles.
So it’s probably best to take advantage of oil and gas as a stock whenever there’s an opportunity, but I think you can’t take a two- or three-year view on oil and gas.

In fact, we say that value migration will happen from EV and new energy sectors which will occupy more space compared to the oil and gas space in Nifty right now.

But just about the consumption, a little more detail because I see Trent as one of your main bets there. I just wanted to understand what you’ve been doing with your exposure, whether you’ve increased it further with the kind of performance you’ve seen and the fact that you’re getting into a lot of other competitive spaces like lab-grown diamonds, etc., or are you getting some gains now given the fact that the stock has risen significantly?
Madanagopal Ramu: So, we picked Trent almost six years ago, when the stock was almost Rs 350. So, it’s been a multi-bagger for us. And the reason we rebounded at that time was compared to the consumer goods companies, you can really bet on Trent because the growth will be significantly higher and management surprised us even more with the kind of way they turned around Zudio and then we grew it, that really surprised us.

While we went for the west side, Zudio was actually an asset for us and that led to substantial value creation in Trent’s case. So, these are efforts that you cannot get away from. In fact, you can cut them if they have risen and the weight is much greater in your portfolio, but you really can’t go against these efforts. They will continue to surprise you.

And in fact we added Zomato Also two years ago and that has also gone well. So, these are the type of companies and administrations that you want to bet on because they are going to identify new opportunities in the market. And since the overall sector is growing much better because it’s discretionary spending and as household incomes increase, these products will always do well. So, you can reduce the weight, but you can’t really go without these names.

I don’t think it makes sense to replace them with names like HUL or something because HUL may not be able to grow more than 10% in the next three to four years, but if these guys can add new verticals, new markets, I think it can always continue. growing close to 20%. So, we have reduced some weight, but they are efforts that we will continue to invest in.

He also seems to be quite optimistic when it comes to the car and the auxiliary space of the car. Aren’t you worried about valuations and the lower growth expected in the sector in the future?
Madanagopal Ramu: Again, we are very specific here. We haven’t touched on two-wheeled vehicles too much here. We have played Mahindra & Mahindra primarily from a story of SUV premiumization. Once again, this is a classic management change here. He business has been struggling to be present in segments that have not grown, but they have realigned it beautifully in the last three years.

They have launched new products that have done very well and I think they are also focusing a lot more on electric vehicles. There is a long way to go to achieve money in this idea. We are also committed to the electric vehicle as a space to do it well. In auto anc space, if I look Exide and Amara Raja It seems very interesting, mainly because they are investing in battery manufacturing capacity.

The scalability of this business is enormous and you have to give them some time. It’s not something you can expect an immediate return from. But if you invest in them and wait about two years, I think as their plans get underway and they continue to get new orders, we feel like the space for electric vehicles as an opportunity is much bigger than what we’re thinking about right now. .

So for investors who have a slightly long-term orientation towards investing, I think these are great opportunities to get into and these corrections will help you get into those stocks where the market is looking for more short-term opportunities.

Some of these value stocks will be left on the table for you. If you can pick them and stay invested for two to three years, I think you can create much higher alpha compared to the returns that Nifty can offer you.