Profit Taking | High Beta Stocks: Should you take profits in capital market trades? Here’s what Rajesh Bhatia says

Rajesh BhatiaDirector of IT Systems, ITI MFHe says that analysts are saying that there will be a 30% growth rate over the next two years and I’m going to incorporate that and on that basis I’m going to give a higher P/E. These are highly cyclical and high beta companies. So if there is a correction in the markets or if there is a decline, that 30% increase assumption becomes a decline assumption and their P/E’s contract. So there’s the capital market games The beta is high and that assumption is a bit of a stretch as far as he is concerned.

What is the correct way to consider the most popular energy sources in the space, defense and railway sectors?
Rajesh Bhatia: In a word, expensive. I would say that there has been a structural change in the defense and Railway companiesCapital expenditure on railways has increased tenfold in the last few years and the narrative on defence is that we should indigenise, we should stop imports. Not only that, there are targets for exports. So, I get the sense that there is a very consistent need, given the global context and geopolitical considerations, that we will have to increase capital expenditure as far as defence is concerned. There is a preference for domestic companies. I feel that this is going to be a multi-year narrative. But valuations are not comfortable at the moment.The other point, of course, is what to avoid in this market. Would you be tempted to book profits? Are there spaces where you think valuations and growth have peaked?
Rajesh Bhatia: As I have already pointed out, it is very difficult to determine which of the companies has reached its full potential. You can identify areas of weakness, but India is a fantastic market. As a fund manager, I can have a wide range of sectors in my portfolio, find winning companies in the portfolio and that’s it. It’s very simple.

Unlike the US, for example, where the Magnificent Seven are doing well in one of the areas, which is artificial intelligence, and we don’t know how far to extend that area. In India, on the other hand, there are many sectors to operate in. If ever there is a need to be some caution, it would be in capital market operations. In case of capital market operations, the growth rates are supposed to be maintained, but the growth rates are subject to the markets. Analysts are saying that there will be a 30% growth rate for the next two years and I am going to incorporate that and on that basis I am going to give a higher P/E. These are highly cyclical and high beta businesses.

So, God forbid if there is a correction in the markets or if there is a crash, that assumption of 30% increase turns into an assumption of decrease and their P/Es contract. So in that case, the equity market is playing with high beta and that assumption is a bit overblown as far as I am concerned.What is your opinion on the pharmaceutical industry, since it has recently gained support because it was one of the least favored? Is it worth analyzing?
Rajesh Bhatia: Domestic pharmaceutical companies are compounding machines. They have done extremely well. So, I would say that the domestic pharmaceutical industry is like a branded consumer company. And some of these companies have done extremely well. As far as companies that are going global, it is difficult to point to generic cycles. My preference is to bet on companies that are growing their specialty business, so that is where the competitive advantage is created, that is where the multi-year visibility and substantial margins are created. I would like to bet on global markets and companies that are creating these products, which will have competitive advantages and substantial margins.

Let’s look at a topic that has been very popular in some ways, a couple of topics, and I’ll get your thoughts on electric vehicles, natural resource management systems, and manufacturing. These stocks are now trading at price-earnings multiples that are higher than consumer stocks, and their margins are 12-13%. Their ROCE is not that great. What’s going on in this space?
Rajesh Bhatia: In bull markets, investors’ vision becomes broader, and in a bear market, investors’ vision becomes shorter. So, we are in a bull market. So, clearly, people are looking further into the future. electric vehicles As far as electric vehicles go, from point A to point B, the direction is clear. We’re going to move to electric vehicles. I was reading a very interesting article in Fortune about Volkswagen, the world’s largest car company, which is a latecomer to the EV party, but they’re committed to it. They say it’s inevitable, because the costs of electric vehicles will come down over time and the costs of internal combustion engine vehicles will go up.

So the economy will tilt in favor of electric vehicles rather than internal combustion vehicles. Now the challenge is what will happen in the middle, as Bill Gates says, with technology we overestimate the absorption of technology in the short term, but we underestimate it in the long term. We are probably in the process of overestimating how much of this will happen in the short term, although I think the direction is clear.

I can go on about that, but, the point is that with EVs there is still a lot of things to be absorbed, in the two-wheeler space, the two-wheeler EV market is around 7% and two-wheelers are not a very fast growing market in India, it is already a highly penetrated sector. So, the absorption there is around 7%. There is a lot of forecasting going on with this business, but there is still a lot of things that need to happen. How will the subsidies play out? At what pace will their costs come down? At what pace will consumers start accepting for this product given the range anxiety, etc. There is still a lot of things to happen. But from point A to point B, it is clear that EVs are going to be a dominant bet as we move forward.