Portfolio Restructuring: Why Export-Oriented Companies Are Poised for Success? Venugopal Manghat Answers

“The focus on exports is clearly very strong on the part of the government as the country is doing well, the economy is doing well and one of the key ingredients of the growth that is anticipated over the next five to seven years is the export component and that is what we are looking at and specifically companies that are exporting and are likely to perform well on the export side over the next five to seven years,” he says. Venugopal Manghat, HSBC Asset Management.

First I want to talk a little bit about this. Export Opportunities FundNFO. Tell us a little more about it, its foundation and its theme.
Venugopal Manghat: This one is focused on India’s export opportunities. So, we are looking at a universe of stocks or companies that would have export revenues of more than 20%. And it can include both merchandise and services exports, both will have a place in the portfolio. It would be a flexi-cap type of portfolio, meaning you can have large-cap, mid-cap and small-cap companies across the spectrum.
The focus on exports is clearly very strong on the part of the government as the country is doing well, the economy is doing well and one of the key ingredients of the growth anticipated over the next five to seven years is the export component and that is what we are looking to target and specifically those companies that are exporting and are likely to do well on the export side over the next five to seven years.

Because in the context of the Fed’s massive rate cuts, I wanted to understand how you think about the services component, which is largely dominated by IT Services Everything is going to be okay.
Venugopal Manghat: Yes, I think of India’s total services exports, about 50% is still IT services exports. While this has been going well for some time, the growth rates have come down if you look at the last 25 years or so.

And we believe that the post-COVID boom that the IT sector experienced and the outperformance of the stocks are now behind us. There were a year or two when the sector slightly underperformed, but I assume that last year’s operations should come back and generate gains in terms of revenue growth. As we move forward, I think the second quarter should be better than the first quarter across the sector or overall, and as we move into the third and fourth quarters and probably into the next financial year, we should see better growth in the IT space.

But IT is not the only segment of services exports that we are looking at. We are also looking at all other segments outside IT, of which engineering, research and development and professional management consulting are segments that also contribute significantly to the country’s services exports. As for manufacturing exports, and especially pharmaceutical exports, do you think the Biosecurity Law could be one of those triggers that could boost them even further?
Venugopal Manghat: Yes, I mean multiple drivers of the export story. I think the government incentives are very strong. There is a lot of manufacturing capacity being built across multiple sectors. We are already gaining market share in many segments globally and the traditional export sectors like gems, jewellery and textiles are now giving up some of their market share to newer segments like electronics and manufacturing, industrial goods etc. and in addition to what you mentioned, pharmaceutical ingredients, chemicals, specialty chemicals, all of these are gaining market share in the global export space. So clearly we are looking at some of those opportunities as well and it should be an exciting phase over the next five years or so.
But what about market expectations? Many participants have been saying that we have borrowed returns from the future, that there is an expectation of a temporary correction, but it has not really come to pass and at the moment the blue-chip index is still performing well, even though the broader markets are a bit under pressure. Within this concept, how should the situation be analysed a bit? portfolio reorganization?
Venugopal Manghat: Yes, I think the markets have performed extremely well over the last few years and have gone up so sharply and we haven’t seen too many big corrections over this whole period, other than 3% to 4% corrections on and off over the last 12 to 18 months.

I guess valuations have gone up and warrant some profit-taking, so that’s what you see in the broader markets, which is also healthy. Given that valuations have gone up and prices have gone up, they definitely warrant some profit-taking. But the medium- and long-term story remains intact.

I think that the economic growth Expectations remain quite high and consequently I think earnings growth expectations also remain quite high. So, with that as a backdrop, markets are likely to remain quite strong and positive in the medium to long term. In the very short term, given the run-up we’ve had in the markets, one could expect a temporary correction or a small correction in the markets.

We are already seeing that happening with the broader market stocks, which are correcting further, and the index is holding steady, and one of the reasons for that is also that some of the large-cap stocks or the heavyweights in the index are becoming popular again and their numbers should improve maybe this quarter and going forward. Some of the sectors that were not performing well so far, such as the consumer staples sector or private banks, etc., are also making a comeback.

And all of them are heavyweights of the index and therefore the index is not really showing that kind of weakness, but the market in general is seeing some profit-taking. In the last few days, we have seen stocks correct quite significantly.