Entire power chain will continue to see an earnings acceleration: Abhishek Bhardwaj

Abhishek Bhardwaj, Managing Partner, Green Lantern Capital LLP, says markets have realized over the last six months to a year and more recently, when power demand increased significantly, that India will remain energy starved and there are many drivers for our energy demand, including our focus on manufacturing, which is far more energy intensive as an economic growth driver versus the services sector. Even some of the newer age industries like data centres, if they are AI-driven, are far more energy intensive. Demand for power in a country like India will continue to be significantly higher than what we have seen in the very recent six, seven years.”

Do you think that the market’s own weight will bring the market lower right now? We have started discounting growth way ahead into the future and that kind of a rally is not sustainable.
Abhishek Bhardwaj: To some extent, you are right. Since markets are trading relatively on the expensive side at around 20 times one year forward earnings for Nifty, it is almost one plus standard deviation higher than the 10-year average; so no denying the fact that it is trading in a relatively expensive zone. Where we are seeing more challenges and where Nifty is seeing higher challenges is also an area where there is higher ownership and higher expectations, something that we have seen with HDFC Bank.

There were certain expectations from the bank and ownership. Of course, this is one of those favourite stocks which has done so well for a very long period of time. Market has been concerned about the NIM pressure margins which market perceives will only increase going ahead from here on.


So, given how markets are positioned, we are seeing that despite valuations becoming reasonable, there is a significant ownership in the stock. Also, incrementally we are seeing what the market has suddenly started perceiving that during this period, we may not see credit costs as a concern because recoveries have been very strong. On the gross slippage side, we are seeing some concerns. We are seeing that some banks are reporting higher gross slippages while recoveries remain strong for the other part, but there are certain slippages and that has also brought about some concern for the sector, that is the banking sector.

Overall, the part which was always liked by the market, where ownership remains strong, where valuations are on the higher side, that is where we are seeing more pressure as we all know there is hardly any margin of safety and if there is slight underperformance or disappointment, the stocks are being punished – some of the favourites on the consumption side and also banking.

So, yes, there is a certain challenge. We focus on areas where there should be earnings acceleration and that has been our focus and on the markets.

Let us talk about the engineering and capital goods space, especially from the small or midcap basket, which feed into the power reform theme because big generation companies are making much more power than yesterday and that needs to be transported, which would require transformers. A lot of infra-capex boom is happening, especially on the renewable side. Do you think the earnings growth in the companies which are helping achieve that kind of capex, big earth movers, big equipment companies, even from here on can be supportive? If earnings growth is 20-25% plus in the next 3-4 years, stocks will have cushion. What are your thoughts?
Abhishek Bhardwaj: You are focusing on an area where we see a lot of opportunities. So energy as a segment over the last many years was ignored. Some of these stocks, particularly on the fossil fuel base, were trading as if there was hardly any terminal value. What markets have realized over the last six months to a year and more recently, when power demand increased significantly, is that India will remain energy starved and there are many drivers for our energy demand, including our focus on manufacturing, which is far more energy intensive as an economic growth driver versus the services sector.

Even some of the newer age industries like data centres, if they are AI-driven, are far more energy intensive. Demand for power in a country like India, given our focus also, will continue to be significantly higher than what we have seen in the very recent six, seven years. So it should grow at 6-7% per annum and we have not invested for that. We remain positive in the entire chain. So as a country, we are investing a lot on renewable space.

Globally these investments are happening. Then we will have to increase capacity on the base load. And so generation is one part, since we will have to increase generation and particularly on the renewable side, the place of generation will have to be different than what it is for the fossil fuel base, which are usually pithead plants and renewable would be where there is either sunlight or where there is wind on the coastal areas.

So we will have to create a different, newer grid, and a lot of investments have to go into that. We see that this is at least a 7-10 year theme. We will have to continue to invest. Over the last many years, we have not invested. Players in this segment have either reduced capacity or have actually closed down. So some of the enablers, say even in transformer and other areas as well, transmission companies, there is reduced capacity and increased demand, which should lead to all the drivers of earnings growth, which is sales should grow, gross margins should increase.

In this segment, there should be operating leverage and since there is significant visibility in these businesses, we should see a multiple expansion as well. So that is an area of interest for us and you are right, it should continue to see an earnings acceleration.

Have you started looking towards consumption – be it pure consumer or FMCG type of companies which have seen very weak volume growth? The entire segment at the lower end of the K-shaped recovery we keep talking about, be it QSR, consumption, apparel, retail, have been very weak. But the good part is that even the stocks have not really moved. , In fact, they are pricing in the worst. Does it provide a good hunting ground with attractive risk reward?
Abhishek Bhardwaj: We have selectively started looking at the space. In some of the areas, valuations are not very comfortable. The other important part is that we will see a very different demand environment in India and it is something that we believe is here to stay, wherein you will see a relatively stronger urban demand and weak rural demand, something which is visible in the near term.

So keeping that in mind, we will have to be mindful of other businesses and stocks that we select. Also, valuations on some of the larger names are still not where we would want them to be. But there are certain areas in the branded apparel or durable side, one could selectively start looking at because there is some reduction in cost pressure and there is a case for improvement in margins to some extent.