To help you stay ahead with your investments,

we speak to 10 fund managers and take their outlook

on 10 key sectors of the economy

The interviews in this e-book were conducted in January 2021 and quote data as of then
PSUs

‘There is a good margin of safety

at the prevailing valuations’

Mahesh Patil Co-CIO, Aditya Birla Sun Life Mutual Fund

How do you see 2021 in terms of wealth creation and value unlocking in PSU
stocks? What are the various triggers that can kickstart a rally in PSU stocks?
What are the key pain points that you would like addressed?

W
e had launched Aditya Birla Sun Life PSU
Equity Fund a year back looking at the
opportunity the public-sector-
undertaking segment offered over the
coming three-four years. This space has not generated
any returns for the last decade and therefore offers
extremely cheap valuations. There is a good margin
of safety at the prevailing valuations. The BSE PSU
Index trades at 7.5 times on FY22 basis and current
P/B of 0.9 times. These companies continue to pay
high dividends. The Index’s dividend yield is
currently at 3.5 per cent. Certain companies offer
dividend yields in high single digit to low double
digits as well. The key focus in our PSU Equity Fund
has been the venerable public-sector enterprises.
These companies are dominant in several critical
sectors of the economy, like defence, power,
engineering, mining, oil and gas, insurance, etc. Some
of them even operate in regulated sectors with low
earnings risk.
The earnings yield for some of these companies
continues to be attractive and competitive compared

2
to the debt papers issued by them, underscoring the
valuation anomaly. When this gap expands to as wide
as it has, say 17.8 per cent pre-tax earnings yield
(inverse of 7.5 P/E, grossed up for 25 per cent tax)
versus 6 per cent (pre-tax) borrowing rate, it is
possible, theoretically, to borrow an amount equal to
whole of the market cap while blocking only a
portion (one-third) of earnings to pay for that and use
it to distribute cash to equity holders.
One may question this hypothetical exercise on the
grounds that earnings may decline, or these old
economy businesses may not survive long enough to
repay the principal. We are not saying that just
because certain stocks are trading at cheap multiples,
we should expect great returns from those. There are
many government-owned companies that dominate
their industries, with little or no competition from
the private sector. Some of them have a large scale
and have built their businesses over a period of time
where private sector is yet to make a mark or has not
met with material success, like power generation and
transmission companies.
There are others where PSUs are ahead of
competition due to their decades of experience and it
would take an extremely long time for others to catch
up, for instance, defence. Then there are large mining
companies or fuel-marketing companies, where
competitors have a small scale and by virtue of being
early in the game, the PSUs have best-quality assets.
The idea is to stay away from areas where
competition from the private sector can take away
market share fairly rapidly. Most of these companies
have strong balance sheets, attractive ROEs in their
respective industries as a result of their strong
position.
Sectors like power and defence are also witnessing
favourable policy developments. The central
government has sanctioned and started disbursing
funds under a reform-linked liquidity package to
state electricity boards, which can, in turn, improve
power gencos’ cash flows. Defence companies have a
healthy order book. The government has recently
announced imports embargo for specified items and
allowed export of certain others, clearly demarcating
the opportunity for the domestic industry. This
Fiscal pressures against the backdrop
of COVID-19 build a stronger case for
strategic divestment, especially when
the divestment through the ETF route is
already close to the upper cap in
larger companies
3
It is neither a buy-and-hold nor a get-
rich-quick opportunity; it offers a
different path from the general market
and a reasonable margin of safety
provides additional runway for these businesses.
Our assessment of business prospects for many of
the PSUs varies from that of the market. If the
market remains repulsed by these names, the returns
would have to come through the ancient way of
holding for dividends, which are going to be
substantial. Another possible outcome is for prices to
rise to a level which normalises future returns to a
level similar to that of the overall market.
Recently, we have seen these companies resorting
to share buybacks to return cash to shareholders,
which has three clear benefits: (1) retires shares at
inexpensive valuations; (2) boosts earnings per share;
and (3) reduces the supply of paper from the market.
Strategic divestment offers another significant
catalyst for value unlocking. This mechanism is
likely to be a focus area for the government to garner
finances. Fiscal pressures against the backdrop of
COVID-19 build a stronger case for strategic
divestment, especially when the divestment through
the ETF route is already close to the upper cap in
larger companies. Hence, we do not think there would
be significant supply pressure via the ETF route in
bigger PSUs. The pain point in these stocks has been
regular supply of paper by the Government of India,
regardless of price levels. This should get addressed
favourably now. Therefore, we believe that the second
scenario is more likely for returns from the PSU
space. A commonly discussed concern is directed
capex to meet certain growth objectives, without
paying heed to project economics. A company-specific
nuanced view becomes important to capture return
from the space.
Globally, value stocks have underperformed
severely over the past five years. With economic
growth recovering rapidly, these cyclical industries
are coming back strongly. Such periods of strong
growth are typically associated with better
performance of the value theme as fruits of growth
are more widely dispersed. We believe that such
tailwinds should help stocks in this space as well.
There is a specific opportunity here for three-four or
maybe five years and people ought to look at this
space with that kind of expectation – it is neither a
buy-and-hold nor a get-rich-quick opportunity; it
offers a different path from the general market and a
reasonable margin of safety.
 Healthcare

‘Double-digit earnings growth is

expected for the sector’
After a stellar run in 2020, how
do you see 2021 for pharma and
healthcare stocks? How
comfortable are you with valuations now
and which areas in the healthcare space
should do well?

2
020 has been an excellent year for
pharmaceuticals, with the S&P BSE
Healthcare index delivering about 62 per
cent returns and outperforming the broader
indices by more than 45 per cent. The sector
gained prominence in light of the pandemic and
pharma, being a necessity, was one of the
businesses least impacted by COVID-led
lockdowns. The earnings for the sector received a
fillip, driven by good growth in export markets,
API business, contribution from COVID-led
opportunities and strong margin improvement Tanmaya Desai
seen across companies, led by cost savings in
Fund Manager, SBI Healthcare Opportunities Fund
India. That, along with less macro headwinds in
the US on pricing and the regulatory-inspection
front and a weaker rupee, led to a re-rating of the
sector at the same time. schemes) playing out, we expect the valuations to
While valuations look optically high as they are sustain and returns to be commensurate to earnings
slightly above 10-year average valuations, the growth for the sector.
relative sector premium to broader indices is at one Additionally, the sector valuations are also
standard deviation below the 10-year mean. We expected to be supported by the fact that there has
believe the focus would be on earnings growth going been a shift in capital-allocation strategies by most
forward and with ample growth catalysts across pharma companies to focus on core businesses,
markets/segments (India – acute-therapy growth including India, US generics and emerging
expected to bounce back with normalisation in markets, and moderation of investments
business; exports – stable to improving trends (calibrated in some sense) in high-risk areas such
particularly in the US and EU; API – higher volume as specialty/complex generics, which should result
growth also to be boosted by initiatives like PLI in a more sustainable growth profile for the sector
in the medium to long term. This shift is
accompanied by a greater focus on cost efficiencies
While valuations look optically high as and balance-sheet quality, visible in the sharp debt
they are slightly above 10-year average reduction seen for the sector over the last six to
nine months. Hence, double-digit earnings growth
valuations, the relative sector premium is expected for the sector which would be
to broader indices is at one standard accompanied by an improvement in return ratios
deviation below the 10-year mean and a decent cash-flow generation going forward,
thereby supporting valuations for the sector.

4
 Information Technology

‘From a one-two-year perspective

the outlook is very robust’
After a dream run in 2020, how
do you see 2021 for IT stocks?
What are the key threats that can
stall a rally in IT, for instance, the change
in US administration?

T
his year has been unprecedented, where we saw
equity markets seeing their multi-year lows as well
as all-time highs and the IT sector has been at the
forefront of this rally, with BSE IT giving about 65
per cent returns over the last one year and an excellent 1.5
times returns from its March 2020 lows. The valuations for
the sector are about +2 std higher than its long-term
average, so one question I often get is the outlook going
ahead, especially when the sector has seen its valuations
expand even during pre-COVID years.
If we step back a little and look at the core fundamentals
around why the sector has gathered interest, one will
Meeta Shetty Fund Manager - Tata Digital India
realise that the technology was the most critical aspect in Fund
this pandemic as it has allowed seamless functioning of
businesses across industries. What this meant for the sector
was (1) higher spend on areas like digital transformation,
cyber security, robotics, etc., and (2) cloud migration. Cloud
penetration, which currently stands at about 20–25 per cent, in a remote-working environment. The early part of the
is expected to reach about 50 per cent much earlier than pandemic was seeing smaller deals getting closed but as
expected due to the pandemic. the risk appetite of the Fortune 500 goes up and the effects
Indian companies are well placed to capture these of COVID-19 abate, the digital transformation trends will
tailwinds. Digital revenues (which include cloud migration) accelerate; we have already started to see large deals
for IT companies have already been growing at about 40 per coming through.
cent CAGR over the last couple of years and COVID will On key threats, US administration changes do pose
give a further push to this. As digital takes a larger share of some risk, especially if the tax rates were to go higher. But
overall revenues (from about 40 per cent currently), the I don’t see much risk from H1B-visa-related issues, as
pressure from the legacy leakage will also alleviate.   Indian companies have been hiring locals over the past few
From a one-two-year perspective the outlook is very years and they now account for more than about 50–60 per
robust as the only answer to all problems is IT spend, cent of the total employee strength in the US. Another
whether it is continuity of business in this new world of aspect to keep in mind would be the currency risk, as it
social distancing, getting cost optimisation in a year when can impact margins in the near term. Over the medium to
revenues are badly hit or ensuring safety of critical data long term though, I wouldn’t worry much as we have seen
currency movements getting neutralised.
Digital revenues for IT companies have Hence, I see more tailwinds for the sector than
headwinds and this looks like a structural tailwind and not
already been growing at about 40 per cent a cyclical one. Given that the sector has tremendous
CAGR over the last couple of years and potential as the world is moving towards digitisation, our
COVID will give a further push to this advice to investors would be to invest in this thematic fund
to capture the sectoral tailwinds.

5
 Consumption

‘Consumer-sector valuations have

seen a good re-rating’
After the uncertainty created by
COVID, how do you see 2021 for
the consumption space? Which
areas are likely to excel? Also, after the
recent rally, how comfortable are you with
the valuations in this space?

FMCG
The FMCG sector growth was anyway trending down
prior to the COVID outbreak owing to liquidity issues
and weak rural demand and touched as low as about 6
per cent during the October–December 2019 period, as
per Nielsen. Going into the COVID pandemic, overall
demand lost for FMCG companies was low as most of
the things fell under the essential category. Growth for
categories such as food, health and hygiene accelerated
because of more in-house consumption, while Ankit Jain
categories like beauty products and out-of-home Fund Manager, Mirae Asset Great Consumer Fund
consumption saw muted demand. Overall impact on
earnings has been even lower as all businesses
resorted to ‘cost efficiencies’ to protect margins.
Post COVID, confidence in the demand recovery in
the FMCG sector runs high backed by (1) continued
good rural demand led by government stimulus, a years. It will be interesting to see the margin
good monsoon and a higher agri inflation; (2) pent-up trajectory going ahead, with rising raw-material cost
demand and a low-base effect in discretionary and (both crude and agri-linked) and higher discretionary
out-of-home portfolios; (3) an improving liquidity costs acting as headwinds.
situation; and (4) a positive delta between value and
volume on account of inflation unlike earlier years of Consumer discretionary
a negative delta. Furthermore, larger companies will The consumer-discretionary/retail sector business was
grow at a faster pace as a result of the consolidation assumed to be significantly impacted owing to
of market share, consumer migration from lockdowns and assumption of overall job losses
unorganised players and further expansion in impacting discretionary spending. Recovery in this
distribution networks. segment (ex-retail) has clearly surprised, with
The health and hygiene segment has clearly turned organised players seeing significant market-share gain
out to be a mega trend and has seen massive expansion across categories like electrical, building material,
in penetration and per-capita spend. Companies are etc., on account of an efficient supply chain and better
well placed to capitalise on this with brand extensions liquidity. Categories like white goods, home décor and
and tailored communication. Branded packaged food is kitchen appliances benefitted as confined settings
another segment which is expected to benefit created replacement demand and also saw increased
significantly out of unorganised (loose products) to penetration. Companies also have shown extreme
organised (packaged products) shift. agility in supply chains, with omni-channel offerings
Most FMCG companies saw good margin expansion to capitalise on the increased demand.
during the deflationary cycle of the last couple of In the aftermath, the demand scenario for

6

The consumer-discretionary sector
valuations are even higher than pre-
COVID levels as most of the businesses
are building in the optionality of a faster
shift from the unorganised segment…
discretionary categories looks upbeat, given the
impact on people’s earnings in case of job losses and
salary cuts has been lower than earlier feared. Also,
structural growth drivers like favourable
demographics, low interest rates, rising per-capita
incomes, low penetration and premiumisation augur
well for the medium- to long-term demand outlook.
Infrastructure
‘The capex-spend bottom is
largely behind’
How do you see 2021 for the infrastructure sector, especially against the
backdrop of COVID-19 and an ailing economy? Which pockets will see faster
recovery and which will test investor’s patience?
M
ost investors are cautious about the capex
cycle since the government accounts for the
lion’s share of capex spending and COVID-
19 pandemic has hit its revenues
significantly. Further, divestment proceeds have also
been significantly lower than estimated. However,
given the circumstances, the central government has
done well on this front as central capital expenditure
has seen growth of about 5 per cent for the period
January–November 2020 on a YoY basis. State
expenditure may take more time to recover, while
multilateral funded projects should continue to
progress better. Overall, we can safely say that the
capex-spend bottom is largely behind and we would
probably do much better than 15–20 per cent decline
for infrastructure spending that many investors would
have estimated at the start of the pandemic.
At a macro level, we believe that the government
would continue with infrastructure-led development at
7
Conclusion
Companies with agile supply-chain management, digital-
marketing precision and omni-channel presence
supported by good balance sheets should keep on gaining
market share at the expense of fringe organised and
unorganised players. Overall consumer-sector valuations
have seen a good re-rating in line with the overall market
over the last six months. Presently, the consumer-
discretionary sector valuations are even higher than pre-
COVID levels as most of the businesses are building in
the optionality of a faster shift from the unorganised
segment, coupled with an increased penetration adding
on to accelerated earnings growth over the medium
term. FMCG sector valuations are still in line with pre-
COVID levels. At this juncture, we see broad-based
opportunity from a longer-term point of view to invest in
good-quality businesses with long-term growth visibility.
one end and support the lower end of the strata with
direct transfer schemes at the other. The focus on
infrastructure would remain high, given its multiplier
effect on the economy and job-creation potential. For
the medium term, the focus on infrastructure would be
driven by National Infrastructure Pipeline (NIP)
projects, whereby the government has identified
projects worth `111 trillion to be spent over FY20–25.
With the COVID-19 pandemic impacting near-term
spends, which were expected to be about `21-22 trillion
annually, we can look at 12–15 per cent CAGR over the
next three-four years.
Infrastructure-related spends should also benefit
from the government’s recently introduced production-
linked incentive (PLI) schemes. The government
recently announced the extension of PLI scheme to 10
sectors other than mobile phones, taking the total PLI
incentives allocation to `1.9 trillion. Assuming the
same incentive-to-capex ratio as the mobile-phone PLI
Central capex
l Central capital expenditure (` bn) l YoY change (%)
500 300
450 250
400
200
350
300 150
250 100
200 50
150
0
100
50 -50
0 -100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
2020
Source: Controller General of Accounts

National Infrastructure Pipeline (NIP)

Investments
Sectors FY20-25 (` bn)
Energy 26,900
Roads 20,338
Railways 13,676
Airport 1,434
Ports 1,212
Urban Infra 19,193
Irrigation 8,945
Rural Infrastructure 7,739
Social infra 3,934
Industrial Infrastructure 3,150
Digital infra 3,097
Agriculture & food processing 1,687
Total 1,11,304
Source: National Infrastructure Pipeline
scheme, new schemes could translate into an
incremental capex of `397 billion and about `500
billion including mobile phones.
Another area to keep a focus on would be the real-
estate cycle. We have seen encouraging sales trends for
last three to five months. If this trend continues for a
few more quarters, we can see broader recovery across
many industries like steel, cement, electricals, tiles,
building materials, etc., which can also potentially
revive private capex.
Ample liquidity in the system (running in excess of
`5 trillion), low interest rates and resolution of
stressed assets in the banking system can support a
revival in infrastructure spending.
Overall, we expect growth of 12–15 per cent CAGR
in infrastructure-related spends over the next three-
four years and the revival would be led by the central
Sanjay Doshi
Fund Manager, Nippon India Power & Infra Fund
Overall, we expect growth of 12–15 per
cent CAGR in infrastructure-related
spends over the next three-four years
and the revival would be led by the
central government and central PSUs
followed by state expenditure…
government and central PSUs followed by state
expenditure, while private capex can take another year
or so to meaningfully grow as the utilisation level
improves across key industries like steel, cement,
autos, oil and gas, etc.
In terms of sub sectors, the key areas of spend
should be railways (including high-speed rail,
dedicated freight corridors and metros), roads, water
(including irrigation projects, Nal Se Jal and
Namami Gange schemes), power T&D, renewable and
defence. Traditional power capex and that on oil and
gas, especially upstream, can be somewhat subdued,
while we expect private capex for now to be PLI-led
and more focused on efficiency improvement and
brownfield expansion.

8
 Oil & gas/Metals & mining

‘Companies in this space are

massively under-owned’
After a shock in 2020, oil & gas
and metals & mining stocks have
started showing smart moves.
Where would you like to bet in 2021 and
what would you avoid?

T
he year 2020 started with expectations of 2.5
per cent global economic growth. Against this,
the world economy probably shrank by 4.3 per
cent as per a report by the World Bank, a
setback matched only by the Depression and the two
World Wars1.
Back in February/March, as COVID started
spreading, estimates and forecasts of all kinds were
significantly revised downwards. Demand was wiped
out and prices crashed. Brent crude prices crashed
over 70 per cent from about $66/bbl (barrel) to about
$19/bbl2, with WTI also going into negative territory.
Demand for crude fell about 18 per cent from 100 Rohit Singhania
million barrels/day in 2019 to a low of 82.4m b/d in Co-Head Equities, DSP Investment Managers
2QCY203. Commodities like aluminium, copper and
zinc went through corrections of 20–25 per cent2, as a
fear of the unknown took hold.
By year-end, however, these same metals were up 38
per cent, 51 per cent and 68 per cent, respectively, from
their lows2. Demand recovery for commodities, led by indicators across most countries are showing positive
China, has been much stronger and faster than supply trends. This can lead to gradual and sustainable global
normalisation across the world. Construction, growth – the World Bank expects the economy to grow
transportation and electrical applications together by 4 per cent in 2021. Low real interest rates are driving
account for over 60 per cent of global aluminium liquidity and inflation expectations have inched higher.
demand. Likewise, galvanising accounts for over 60 On the supply side, there have been announcements
per cent of global zinc demand – all of which of massive capex cuts. For instance, oil companies
recovered towards the end of the year. Copper too has globally had cut about $93 billion or 27 per cent of
strong future potential demand from shift towards their initial spending targets by July itself4. In such
green energy and electric vehicles. capital-intensive sectors, capacity usually has long
Transportation accounts for about 55 per cent of gestation periods, which means demand growth can
global oil demand. It is also the sector which suffered outpace supply growth in the near term. Valuations of
the most due to COVID-19. The oil market was the metals and energy space remain at over 50 per cent
balanced by prompt supply responses from OPEC+ discount to the broader markets, both internationally
nations that together contribute 30–35 per cent of and domestically5. Companies in this space are also
global oil supply.3 massively under-owned, with their weights in indices
We still remain constructive on the commodities and consistently falling over the last decade. These data
energy space. There is increased visibility on vaccines, points make us constructive on the energy and
continued loose monetary and fiscal policy by commodity space.
governments and central banks, and economic Within the sectors, stock selection depends on

9

Demand recovery for commodities, led
by China, has been much stronger and
faster than supply normalisation
across the world
bottom-up analysis and understanding of the different
nuances each company brings with it. For metals, the
level of backward/forward integration, sensitivity to
prices, positioning in the capex cycle and strength of
the balance sheet are a few important factors. For
instance, in the current scenario of inflating raw
material prices, one would prefer companies with
higher backward integration as increasing end-prices
would make companies with higher sensitivity more
attractive. Similarly, for oil-marketing companies, we
look at the relative contribution from refining,
marketing, upstream, pipeline and petrochemical
segments to take calls based on the outlooks for
underlying businesses. Gas companies too have
differences by way of being more B2B- or B2C-
oriented, and their input mix and customer mix differ
as well, so the entire sector is not looked at through
the same lens.
However, from a COVID-19 perspective, we are not
completely out of the woods and must be wary of the
risks. Markets had started pricing in recovery, but any
unexpected deviation from the expected path to
normalisation is a risk. Some key monitorables
include the sustainability of demand recovery,
progress on the rollout of vaccines, efficacy against
new virus strains and changes in the fiscal and
monetary policies. Any change in these factors would
require revisiting our current view on the energy and
commodity space.
Rohit Singhania manages DSP Natural Resources
and New Energy Fund

Sources: 1. The Economist, January 9, 2021; 2. Bloomberg; 3. Citi Research; 4. Duff and Phelps Capex Cut tracker, July 2020; 5. Domestic: BSE Oil and Gas Index and BSE
Metal Index considered against BSE Sensex. International: MSCI World Energy Index considered against MSCI World Index. Data as on January 15, 2021.

Chemicals

‘FY21 has reinforced investor’s

confidence in chemicals’
You are bullish on the chemical space, which did do well in 2020. How do you
see it delivering in 2021? Which segments are you particularly optimistic about?
How does India stand in the global supply chains with respect to chemicals?

O
ver the last decade, Indian chemical
manufacturers have established themselves as
credible partners to global players and that too
in multiple segments as they moved higher in
the value chain. Opportunities will be multifold over
the next decade vs the last one, driven by an increase in
outsourcing and divestments in the developed world due
to rising cost pressure, better availability of feedstock
and import substitution. This will lead to a meaningful
increase in India’s share in global chemicals from the
current 3 per cent, further aided by loss of China (about
36 per cent share) as a reliable partner and continued
shifts from EU/Japan (17 per cent/7 per cent share).
The promise of growth for the Indian chemical
sector has been there for a few decades but it needed a
trigger. That trigger was the Summer Olympics in
Beijing in 2008. China shut down manufacturing
companies in order to reduce pollution levels, which
impacted the supply chains for global chemical
companies, in the quest for cleaner air. Consequently,
global chemical companies began to look at other
markets. The catalyst, as in chemical reactions, was an
unfortunate Xiangshui chemical plant explosion on
March 21, 2019, in Jiangsu, China, where one of the
largest hubs for chemicals in the world was shut down.
The resulting unavailability of chemicals in large
volumes and also broad spectrum or types severely
pushed up prices reverberating throughout the global

10
supply chain. Voila! Indian chemical sector was on the
global radar. The significant surge in queries to Indian
companies saw a resurgent FY20 for chemical
companies as a whole, wherein revenues, profits and
order inflows increased and the Indian companies’
cash counters continued ringing through FY21.
FY21 has reinforced investor’s confidence in
chemicals, led by the sector’s demand resilience
during the pandemic. The government has also turned
more supportive through new schemes like
production-linked incentives (PLI). However, this
optimism has led to a massive rerating of the sector
and it is currently trading at a TTM P/E of 42 times vs
21 times at FY20-end.
India has lower employee costs and strong chemical-
engineering talent. Energy, regulatory and capital
costs are rising for Chinese players. However adjusting
for the same, China is yet ahead for a large number of
commodity chemicals wherein India has not yet
reached parity in terms of pricing. This makes us
cautious in picking companies as we believe not all
companies are prepared to scale up. Even after so
many years of existence, only a handful of
chemical companies have more than $500 million
revenue.
As a trend, we expect collaborations and
partnerships to be formed between companies and
academia in order to advance R&D. Companies in the Pankaj Tibrewal
Senior Fund Manager – Equity, Kotak Mahindra AMC
chemical segment spend roughly 1–2 per cent on R&D,
with the spends largely geared towards process
engineering vs product innovation/discovery. While
this will not change dramatically anytime soon, we business. Companies have to become more global in
expect gradual increase in R&D spends towards global client engagement and may require small overseas
averages above 5 per cent. Companies that innovate, acquisitions/hiring of global talent to augment
especially with environmental friendly chemistries, existing capabilities.
will have a better ROCE, scalability and sustainability We prefer contract manufacturers due to better
of their business. demand visibility and cost plus model pricing and
Hence, we refrain from painting the entire sector believe that this model will continue to grow at
with the same brush and prefer players who tick all healthy rates. Top three-four contract manufacturers
the four boxes of manufacturing facilities, R&D/ in India have established themselves as trusted
product development, client engagement and partners for agrochemical innovators, which may be
adherence to global best practices for HSE (health, replicated in other chemical categories. FY21–23 will
safety and environment). Making supply chain also be crucial for these chemical companies as they
independent of China, upgrading ESG standards and look to diversify into new areas such as pharma and
building organisational bandwidth by hiring of other adjacent verticals. Recovery in global agri
quality talent will be critical in order to scale up the commodity prices too should support these players.
Catalogue players may face some demand challenges
in the near term due to the recurrence of lockdown in
We prefer players who tick all the four European countries. However, over a longer period of
boxes of manufacturing facilities, R&D/ time, we believe these companies have solid business
product development, client engagement models and will attain a bigger size. Domestic agri
input players too should have a better year, led by good
and adherence to global best practices for water levels and agri commodity price inflation.
HSE (health, safety and environment) Pankaj Tibrewal manages Kotak Emerging Equity
Fund, which is overweight on the chemicals space

11
 Services

‘The sector has picked up pace

from September onwards’
The services sector was a major Rahul Baijal
Fund Manager, Sundaram Services Fund
sufferer of the COVID period, be it
restaurants or tourism or cinemas,
etc. Does 2021 provide hope? Which
areas will be more resilient? Which will
take time to recover? Which may never
regain their past glory?

T
he services sector has been a major sufferer
during the pandemic. One of the main reasons
was that it consists of many businesses which
are human-contact intensive and thus have
suffered due to the social-distancing issues and the
fear factor in the minds of consumers. Even post the
lockdown, the agri and manufacturing sectors were
quicker to recover than the services sector. But we
have seen the sector pick up pace in recovery from
September onwards, get stronger over the festive
season in October-November and now it seems to be
sustaining the momentum into the new year.
But when I look at the recovery, it’s been very
‘uneven’. Different businesses have recovered/are
recovering at different speeds. In the first bucket, I
would put businesses which have actually benefited
due to the change in consumer behaviour and work-
from-home/anywhere habits, for example, telecom
companies, many online service providers (both B2B
and B2C), home-delivery companies in the domestic
market and many IT services companies that are
benefiting from the acceleration in digital- bulk of the pain has been felt through a prolonged
transformation agenda of global companies. disruption and still there is no full clarity when life
The next bucket would be the early-recovery will be back to pre-COVID normal includes
candidates, where I would put businesses like food and multiplexes, garment retailers, the travel-industry
grocery retailers, banking and insurance services. The ecosystem – airlines, hotels and restaurants. Hopefully,
mid-stage recovery bucket would include large as the vaccination programmes pick up pace in India
jewellery retailers, hospitals, diagnostic chains, in the coming months, it should further aid the
logistics companies. And the last bucket where the recovery in all the buckets, especially in the last two.
At Sundaram, we have a services fund, which is a
When I look at the recovery, it’s been differentiated product and invests in six themes and 15
sub-sectors within the services sector. It follows a
very ‘uneven’. Different businesses multi-cap style with an optimally diversified portfolio
have recovered/are recovering at of about 45 stocks. It’s a very differentiated product
different speeds. and we think it’s only one of its kind in the industry
and would recommend investors to have a look at it.

12
 Automobiles & aviation

‘The industry should be on

track for recovery’
After COVID virtually put a brake on
vehicle sales, the auto sector seems
to be on a road to recovery. How do
you see 2021 for it? Which segments will
do well? Which will keep experiencing the
pain? Do comment on aviation.

T
he Indian auto industry faced challenges on the
volume front even prior to the COVID-19 period.
During the current fiscal year, the pandemic had
an impact on demand. We believe that after two
years of demand correction, which was worst in the last
four decades, the industry should be on track for recovery.
For example, the passenger-vehicle segment, which
contracted by 18 per cent in FY20 and continued this trend
for the first few months of FY21, has started to register
growth over the last few months. The driving force behind
long-term demand in this segment is a low penetration
rate (about 10 per cent at the household level). The two-
wheeler segment, which also saw a sharp decline in
demand of around 18 per cent in FY20, continues to
de-grow in FY21 (year-to-date). This segment is also well-
positioned for recovery.
In both segments, demand has been affected by
significant cost increases relative to income levels. These
cost increases were the result of various regulatory
changes like change in emission norms, change in safety
norms for the vehicle and regular cost increases brought
about by higher commodity prices. In the interim, buyers
were also forced to buy compulsory third-party insurance
at point of purchase for a period ranging from three to five
years. On top of it, tighter lending norms by financial
institutions (post trouble in a couple of NBFCs),
expectations for a cut in GST rates and confusion around
the validity of the registration period for BS4 vehicle also
Within this [aviation] sector, leisure and
personal travel have picked up well,
whereas corporate-sector demand, which
is anywhere between 40 to 45 per cent of
overall demand, has been slow to recover
Sachin Trivedi
Fund Manager, UTI Transportation and Logistics Fund
resulted in the postponement of demand. However, many
of these issues are behind us and we expect a gradual
recovery in demand. This recovery should also be
supported by replacement demand, which has lengthened
over the past few years.
The MH&CV (medium and heavy commercial vehicle)
segment, where the cycle is steep, recorded a decline of
nearly 47 per cent in FY20. FY21 (year to date) demand has
also remained weak but has gradually recovered over
recent months. We expect that the recovery in this segment
will be driven by natural replacement cycle, the
improvement in economic activity, lower interest rates and
improvement in the income level for truck operators as
rentals have been improving. The demand for other
vehicles which are used for commercial use, like three-
wheelers and the bus segment, is expected to remain in
weak in the near term.
In the aviation sector, which has experienced double-
digit growth in recent years, demand has been impacted by
the outbreak of the pandemic. However, within this sector,
leisure and personal travel have picked up well, whereas
corporate-sector demand, which is anywhere between 40 to
45 per cent of overall demand, has been slow to recover.
The corporate-segment recovery may continue to remain
weak. International travel is expected to rebound as
pandemic restrictions begin to be lifted.

13
 Banking & finance

‘We are witnessing a

K-shaped recovery’
How do you see 2021 for banking
and NBFCs in terms of loan growth,
NPA stress and profitability? Which
pockets look promising? Which appear
vulnerable? 

F
or the year, loan growth is likely to be in the
high single digits. The reasons for the same are
as follows:

The positives: Real-estate demand has found its mojo

due to low interest rates, stamp-duty reductions,
reduction of premiums, propensity to clear the
inventory from developers by taking haircuts, etc. By
virtue of the fact that the sector is the second-largest
employer and feeds into multiple parts of the economy,
multiple virtuous loops can get triggered if the real-
estate sales sustain into the ongoing calendar year.
Besides, this will lead to deleveraging by developers.
Thus far, the trends are on an improving trajectory.
The negatives: (1) Capacity utilisation levels are
depressed and we are unlikely to see significant capital
expenditure from the corporate side. (2) Household
balance sheets are still weak. We are witnessing a
K-shaped recovery, where the upper arm of ‘K’ is
represented by the corporates, salaried segment,
which have seen significant improvement in their
surpluses, while the lower arm of ‘K’ is the large
number of SMEs, self-employed individuals who have
been affected and are struggling with their income
levels. Between households and corporates, corporates
are likely to emerge as the beneficiaries of the initial
phase of the cycle. With time, this should percolate
down to household/SME balance sheets.
If the government were to come up with a large
fiscal stimulus or can incentivise exports
In the initial phase of the cycle,
housing-finance companies look most
promising as their fundamentals are
significantly improving
Roshan Chutkey Fund Manager,
ICICI Prudential Banking and Financial Services Fund
meaningfully (which has the potential to offset lack
of a large fiscal stimulus to an extent), then we could
see higher credit growth.
Similarly, NPA stress in the system is also
contingent on the sustenance of recovery that is
currently panning out. Thus far, the trends are
encouraging. Given the large liquidity in the system,
the ECLGS (Emergency Credit Line Guarantee
Scheme) and restructuring schemes, we have been
successful in postponing the stress levels for now. But
if demand recovery fails to sustain, then we are likely
to see stress building up at a later time.
In the initial phase of the cycle, housing-finance
companies look most promising as their
fundamentals are significantly improving. As the
recovery broadens out, we expect SME financiers and
smaller NBFCs to do well too, which currently appear
to be the most vulnerable.

14
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February 2020 `125

Profit masters
How are they doing now?
Volume XIII, Number 8 February 2020

Stock Advisor p. 12 Interview p. 40 Stock Screen p. 52

A lifetime of research Gopal Agrawal of DSP Mutual Fund Stocks selected as
and understanding on the markets in 2020 per predefined filters