Markets: Sushant Bhansali on two sectors that can create big value in FY2025

“Looking at the way the ministers have stayed in office (there have been no major announcements so far), it looks like there will be continuity in policy. Fiscal discipline, which I think has been rather positive over the last decade, should continue. And apart from that, the focus should also continue to be on manufacturing or renewable energy and infrastructure,” says Sushant Bhansali of Ambit Asset Management.
The budget is just around the corner, all eyes are on it and many announcements are expected for many different sectors. But I just wanted to know from you how you see the budget announcement this time, will it be a populist budget or will you keep a close eye on any of the sectors and hope for some big announcements as well?
Sushant Bhansali: Yes, definitely. It is a big event, the event of the year from our point of view. It is probably not the elections, but we have been looking forward to the budget because, as there is another five-year term, the first budget will determine the mindset of the government.
Looking at how the ministers have stayed in office (there have been no major announcements so far), it looks like there will be continuity in policy. Fiscal discipline, which I think has been rather positive over the last decade, should continue. And otherwise the focus should continue to be on production or renewable energy and infrastructure.

So it will be worth watching for something big along those lines. And in terms of populist versus fiscal prudence, I would say fiscal prudence will prevail, but there will also be some populist measures which should bode well for the rural economy and the lower consumption strata. So those are the things we expect from this budget.

Another theme that is still holding up very well is the PSU pack because we see the government post the election result is running at full speed and maintaining the momentum of their investments in various sectors and under that the PSUs are also holding up well. So I wanted to know what are the big themes of the PSU pack that you continue to bet and since the run up has been pretty good for all these companies here, are all the areas that you are finding still of good value to investors?
Sushant Bhansali: So the value becomes attractive only when you extend the tenure of your investment. On a one-year basis, it is probably very difficult to find value, but on a three- and five-year basis, there are definitely many niches across the space, including PSUs.

When you look at how attractive the earnings and balance sheets of PSU companies have become in the last three years compared to the last 10 and 15 years, it becomes clear why investors are betting on these names. And if this momentum continues, the valuations are definitely attractive from a long-term perspective.

As we are also in the middle of earnings season and we have been getting good numbers from IT companies so far, we wanted to know what are your views on the IT sector currently as all these companies have come down a lot from their all-time highs. So do you find that the IT sector has value and how do you see this particular sector and how do you place your bets in the large cap and the mid and small market segment, especially in the IT sector?
Sushant Bhansali: IT has definitely been attractive. We have said in our communications both to our clients and to the public that IT and chemicals are two sectors that were probably outsiders and would create great value in FY2025, and we are sticking to that. The results so far on the IT side have been, I would say, pretty good and there have been no negative surprises so far, although very few companies have announced their results so far. But the sentiment in the industry, the hiring patterns, are constructive at this point in time.
What is your view on the pharma sector because we are seeing some areas, not only the Nifty 50 is hitting its all-time highs, some other sectors are also hitting their all-time highs at least in today’s trading session. But keeping the long-term perspective, are there any areas that you find attractive in the pharma sector? I am asking this because recently all these API players and CDMO companies are trying to get back on track. So what is your view on the pharma sector?
Sushant Bhansali: Yes, definitely. I think US generics are a big player. We have only seen price declines over the last few years and that seems to have reversed or probably bottomed out if not reversed. That is good news for the Indian pharma exporters, be it on the generics side or the CDMO side, also on the CSM side and the earnings numbers, particularly I would say the de-inventorying should lead to inventory reductions in many of the innovators who are sourcing production from CDMO companies in India and that is also true for chemicals. There is a similar pattern where because of the de-inventorying and now the likely reduction in interest rates and the working capital becoming, I would say, much more accessible and cheaper as a result, that will lead to re-inventorying and probably price rise as well.

So higher volumes with better margins should lead to good returns and that’s why I think investors are currently focused on buying these names early enough. The returns might look a little less attractive on a multiple basis and in the current context, but the returns are likely to surprise for both FY2025 and FY2026 and that’s why I think investors are trying to position themselves at that time and move from sector to sector.

A couple of stock ideas that we got, particularly from the Ambit team, and we just presented to our viewers as well, are a couple of bearish ideas or the company is not so bullish, these include ABB India as well as Titan. So I just wanted to understand, what is not reassuring is just the valuation part or do you think the growth prospects are not so lucrative that you go ahead and invest more in these names and they recommend or consider them a short idea here?
Sushant Bhansali: So I think while people are impatiently waiting for the results, the early indicators are suggesting that there could be some consolidation in the sectors. That’s why – particularly in companies that are valued at very high P/E multiples despite the longevity premium – there are short-term downtrends in earnings growth that can lead to investors finding unattractive ideas in those sectors and moving their money to other sectors that hopefully offer better earnings growth in the short term. That’s why there’s probably some concern across sectors. That’s not just limited to the consumer goods sector or probably infrastructure. There will be areas where a slight doubt about the near-term momentum of earnings growth can lead to a lack of investor interest and a shift to other sectors.

We have actually got your positive views on IT and chemicals sector but since you believe the budget could be populist and the government’s focus could be to do good for India, the consumer sector is also expected to pick up. Given this, how do you see FMCG as one of the current strategies? Do you want to go ahead and re-bet or has the company already taken a positive stance recently? What is your outlook on the FMCG sector?
Sushant Bhansali: Again, in line with chemicals and IT, I would say we are likely to see more earnings surprises in the coming years and if the government comes up with some populist spending cuts, that should help consumption at the bottom of the pyramid and lead to a revival in FMCG volume growth, which has not happened in the last few years post-COVID. So FMCG is probably also a good sector to bet on, along with IT and chemicals.

Similar patterns, that is, visibility and surprise of earnings growth on the positive side is much more likely to be expected than on the negative side, and that is why I think we have already seen some movement in these sectors over the last month or two.

The beauty of this whole journey over the last two or three years, especially the last few months, is that sector rotation is happening very quickly. Investors are moving from one sector to another and are probably not sticking with just one or two sectors, which was typical in previous bull runs. So hopefully this bull run will continue for a lot longer.

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