Mayank Mehraa, smallcase manager and principal partner at Craving Alpha, is betting big on the technology sector and says it is set for big gains even as uncertainty prevails over demand following concerns about the health of the global economy.
"I firmly believe that it is the time to start pouring in money into the IT sector," he says. Many Indian IT companies have shown remarkable resilience and are poised to reap significant rewards as the rate-cut cycle begins, says Mehraa, who has more than 10 years of investment experience.
Mayank says new-age companies like MTAR Technologies, MapmyIndia, Zomato and Paytm are not just businesses, they are decadal stories. "… these companies are poised to represent India on the global stage," he tells Moneycontrol in an interview. Edited excerpts:
Your take on defence, capital goods & railways segments which are seeing strong order wins?
India's defence, capital goods, and railways sectors are currently experiencing robust order wins, driven by various factors such as the government's infrastructure development focus, increased defence budgets, and growing demand for public transportation. These industries have undergone fundamental changes over the past few years, and the results are now becoming evident.
The defence sector is projected to achieve a compound annual growth rate (CAGR) of 7.6 percent from 2022 to 2027, indicating substantial growth potential. Similarly, the capital goods sector is expected to see a CAGR of 8.2 percent during the same period, reflecting its strong prospects. Additionally, the railways sector is anticipated to grow at a CAGR of 6.5 percent over the same timeframe.
It's essential to note that, despite the current abundance of order flows, these industries are highly cyclical. As a result, one should exercise caution when extrapolating current order volumes into the future. Fulfilling these orders often takes a considerable amount of time, and the industries may undergo cyclical downturns in the future.
What is the key to China's recovery?
China has been grappling with significant challenges in recent years, and one of the most pressing is its aging population. The median age in China has risen to 40, a notable increase from 28 in 2000. China's growth has historically relied on scale, extensive infrastructure development, and exports. However, they've encountered obstacles in their export sector due to factors like the Covid-19 pandemic and environmental concerns related to manufacturing.
China's growth prospects could hinge on several factors, including improvements in its regulatory environment, tax policies, and interest rate cuts. While many companies have been exploring China + 1 strategies to diversify their supply chains, China remains an attractive destination due to its ability to offer low-cost manufacturing with minimal error rates. It's plausible that, as these issues are addressed, companies may be drawn back to China for its economic advantages.
Do you think it is time to start pouring money into the IT sector?
Yes, I firmly believe so. The global IT sector experienced a significant correction, mainly due to aggressive interest rate hikes. In December 2022, we were quite bullish on Nasdaq, anticipating a reversal in the Fed's interest rate cycle. Although that reversal didn't materialise, Nasdaq has still surged by 33 percent year-to-date.
However, when we look at the Indian IT Index, it's only up by 13 percent, and we are nearing the end of our rate hike cycle. Many IT companies in India have shown remarkable resilience in recent quarters, and they are poised to reap significant rewards as the rate-cut cycle begins.
Indian IT firms are essentially the brains behind technology worldwide, which makes them attractive to foreign investors as well. This sector has substantial potential for significant foreign investment.
One theme that can turn out to be the multi-year story.
"You know how we get these messages about how Wipro, ITC, etc have made multi-fold wealth to their IPO investors?”
I believe that companies like MTAR Technologies, MapmyIndia, Zomato, Paytm, and others in this new-age category are not just businesses; these are decadal stories. If we consider the immense potential India holds in the coming decade, which I'm highly optimistic about given recent accomplishments, these companies are poised to represent India on the global stage.
It wouldn't surprise me if, in the years to come, people worldwide are using services like Paytm. This scenario seems increasingly likely, especially with the adoption of UPI spreading to more countries. These companies have the potential to become global giants, and I'm excited about the journey ahead.
Do you expect a big expansion in the power sector?
India's power sector is set to grow significantly in the next ten years. The government plans to invest around Rs 34 trillion to achieve a massive 900 GW of installed capacity by 2034. They also want to improve the distribution network, which will benefit energy infrastructure, transmission, and financing.
To make this happen, the government wants more private companies to get involved. This will lead to more innovation and efficiency and help reduce our reliance on fossil fuels. Many big companies are already entering the renewable energy sector, which aligns with our ambitious goals.
It's important to note that a large part of India still doesn't have stable access to electricity. To become one of the world's top economies, we need to ensure reliable energy distribution for everyone.
Do you think the PSUs will dominate in the coming years?
Over the past three years, the CPSE ETF has delivered remarkable returns, surging by over 200 percent from 16.27 in September 2020 to its current value of 52.50. This substantial growth in value reflects a significant transformation in India's Public Sector Undertakings (PSUs). These PSU companies had long been overshadowed in India's growth narrative due to internal management and accountability challenges.
However, over the past decade, the government has initiated crucial reforms, embracing technology and consolidation, which has revitalised these companies and placed them on a growth trajectory. Many PSU firms, once burdened with debt and struggling to compete with private counterparts, have now undergone positive changes.
In this space, careful stock selection will be pivotal. It's worth noting that non-finance related PSU stocks, in particular, hold immense potential. These companies often operate as monopolies, a unique advantage in a densely populated country like India. If managed efficiently, they can achieve significant growth, making them compelling opportunities for investors.
Do you see any risk factor that can derail the current market rally?
The ongoing rally in the financial system seems to be running smoothly without any major hiccups, and valuations appear reasonable. The Nifty price-to-earnings (PE) ratio has increased modestly, rising from 20.64x to 22.39x over the past year.
However, it's essential to remain vigilant about potential risks on the horizon. Several external factors could impact the market's stability:
1. Upcoming elections: With elections scheduled for next year, there's a degree of political uncertainty that can influence market sentiment and policies.
2 Global financial crisis concerns: The US faces heightened debt levels, potentially raising concerns about a global financial crisis. Interest rate movements in the US can have far-reaching effects on international markets.
3. European issues: The ongoing conflict in Ukraine continues to create instability in Europe. Escalations of tension between China and India also add to geopolitical concerns.
These external factors, while not directly related to the financial system or valuation, can significantly impact market dynamics.
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