Which pockets will see profits decelerate, remain flattish, or go up in Q1? Pankaj Tibrewal answers

Pankaj Tibrewal, Founder & CIO, IKIGAI Asset Manager, says durables, some of the value retailers, and some of the names on the staple side would be a good way to create a basket to see the revival in consumption over the next 12-18 months.

What is the outlook on the defense basket, the darling of the market last year? For instance, on Thursday we did see quite a bit of fervour building up into these stocks. Are you looking at this space for the long haul as well?
Pankaj Tibrewal: Yes, we were positive on defence but now I think the stocks are pricing in much more than what is expected. I think the next few years' order inflow and earnings growth are already built into the stock prices and do not forget that many of these stocks do not have a large free float, so the prices and the market cap that we are seeing may not be the actual ones which probably should be through the price discovery mechanism and we believe that there is a lot of froth in the space building up on expectations that this kind of order inflow and growth will continue for a long period. So, we need to be a little careful.

The second point that I want to make is that many of the businesses in this space would not generate very great operating cash flow and today the narrative is that just follow the order inflow and the profit numbers, but finally, we know that over longer periods, cash flow is the main driver for stock prices along with growth and growth without cash flow is a recipe for disaster and we believe that in many companies when we look at the cash flow from operations over the last four-five years they do not justify the market caps which the companies are trading at today. Many companies are trading at Rs 30,000-40,000-50,000-crore market cap but they do not make more than Rs 200-300 crores of operating cash. So, do not ignore the basics of investing at this stage where narratives and myths are taking over.

Finally, over longer periods, the basics of investing will help you navigate any challenges in the market. So yes, longer term we are positive, but we will wait for better entry points, and from a bottom-up perspective many of the stocks are in the frothy expensive zone.

Soon we are going to be hitting earnings as well. So, classify for us where do you see a pool of profits to decelerate, where do you think there is going to be some stability or flattish move and where is it do you think profits are going to be strong if you can just make clusters for us?
Pankaj Tibrewal: For the universe as a whole, one should expect moderate profit growth this year in FY25 if you break down into sectors. The first sector where profits are likely to de-escalate in the first quarter is probably cement, PSU banks where the best of the credit cost is in the base and NIMs will be under pressure and deposit growth is not keeping pace with the loan and obviously paint sector where profits could de-escalate further.

Areas where it will be more status quo could be IT and consumer pack and capital goods and infra because the order booking has been strong over the last 18 months and those orders are finally getting to execution mode.

But in the third bucket where profits are likely to escalate, valuations are already pricing in a lot of that growth because most of the capital good names are trading between 60 and 100 times on the one-year format basis. So, those are in the expensive zone and these are the three buckets where we should look at.

In metals, the pricing is under pressure and that is also likely to de-escalate quarter on quarter and year on year. So, I think broadly speaking consumer is one sector where one can see a better escalation in both staples and discretionary a bit and to the extent, infra and capital goods where profits could further escalate from where we were last year.

Is there something in the consumption basket, where a rebound can happen?
Pankaj Tibrewal: The bottom of the pyramid has not been impacted massively over the last three to four years and that should see a rebound. Our broader thesis remains that the rural expenditure has been flat at almost 4 lakh crore for the last four years. And looking at the state elections ahead and the verdict which came in the centre elections, I think there will be an inclination towards some kind of redistribution of budget expenditure towards the rural side.

Hence we believe a few staple companies and a few discretionary companies that cater to the bottom of the pyramid can do well. A couple of retailers did their update in the last few days and we saw very strong SSG growth even though there is no wedding season in the first quarter and the SSG growth was in double digits. I think that could be a leading indication that probably the value retailers and the other formats that cater to the bottom of the pyramid can make a comeback and that space has been ignored for a long period because of lack of growth and that could be an interesting opportunity.

Some of the staple companies have started giving positive commentary from where they were for the last five to six quarters and I think that is another space.

Durables continue to be in a sweet spot and our preference lies there because we believe that the profit pool of the industry is at a decadal low led by huge competition and incrementally no new players want to come in at such low profitability levels and probably with demand coming in we should see a revival in profitability and the summers have been extremely strong. So, if there is a strong summer, it leads to destocking at the dealer and distributor level, and in post second quarter the festive season starts and the primary sales then continue to be strong.

So, we believe durables, some of the value retailers, and some of the names on the staple side would be a good way to create a basket to see the revival in consumption over the next 12-18 months.