Valuations to remain high within the FMCG sector: Mahesh Patil

"I think we are still hopeful that in the next few years looking at the government focus on domestic manufacturing and also the China plus one policy and the domestic growth itself we should see revival in capex going forward," says Mahesh Patil, CIO, ABSL AMC.

Just wanted to get a sense from you when it comes to the entire capital goods space, the manufacturing industrial themes that seems to be a consensus buy at the moment do you concur with the view and if yes which pockets look the most strongest to you, is it let us say rail, is it likes of ABB, Siemens or is it infrastructure the likes of L&T?
The companies have seen reasonably good improvement in the order book though I would say it is still early days for private sector capex to pick up. We are positive on sectors like cement and metals where the capex outlook remains good and companies have announced plans but still a wider private sector capex pickup is probably sometime away.
But I think we are still hopeful that in the next few years looking at the government focus on domestic manufacturing and also the China plus one policy and the domestic growth itself we should see revival in capex going forward.

Within that the government spending on infrastructure in this budget we have seen a significant increase on that especially into a rail in the railway sector where we would see significant investment in terms of the rolling stock.

Also, in defence where we have seen a lot of sourcing from domestic manufacturers so I think it is probably widespread across not only industrials automation.

Having said that I think the valuations of some of the stocks are already factoring in the growth so I think one needs to be careful in terms of the overall further rerating which could happen in this sector. So it will be more driven by companies specific in terms of the segments and order book which is what will drive the performance in these stocks from here on.

In the recent decline or the year-to-date under performance relative to other world markets and especially EMs where is it that you and your funds have cut exposure or gone underweight?
In the initial period when we were looking at the slowdown in the overall global growth some of the global cyclicals is where we had cut down our weight. But I think now to a large extent whether it was IT sector or the commodities or the metal sector we do not see further downside. The stocks have already corrected and in fact over the last couple of months we would have increased our exposure now in the IT sector.

Apart from that, our overall tilt across sectors are not very large. We are not seeing any major kind of an outperformance in a particular sector. There is a lot of sector rotation which is happening but I mean in the oil and gas sector is one sector where we have been underweight now for quite some time. This is because we are not seeing any major kind of outlook improving in that sector and because of the government intervention and policy not being clear that sector is something which we have been underweight for some time.

Besides that, a large underweight would be on the consumer staples where the growth slowdown what we seen last year especially the rural is now picking up but valuations there are still on the higher side. So apart from that, we have not really done any meaningful changes on the sector allocation.

What about the outlook when it comes to the valuations for some of the pharma companies or FMCG companies, do you think that given the kind of growth multiples they have that these valuations are justified, are those sectors that you would look at closely?
The pharma sector overall has underperformed in the last one year because during the Covid period we saw very strong performance in terms of earnings growth because they benefited from the whole Covid wave. I think the base effect is now kind of coming down so we should see a reasonable growth over there. Again, within that space the domestic pharma is where one would see a steady growth with decent profitability and return on capital.

US focussed companies, especially genetics and US export is still seeing a lot of pricing pressure and we see now new pressure as US FDA inspection has started now and we are seeing some concerns again coming back in terms of warning letters.

So that is something which probably still weighing down but overall valuations in the pharma sector are still fairly reasonable compared to their long-term average. So as a defensive from here I think it can be a good sector look at considering that it has underperformed in the last one year.

Regarding the FMCG sector, due to the valuations in the current market where people are worried about growth and also growth concern, I think the FMCG probably becomes a good defensive and that why we have seen some interest in that sector.

The valuations will probably continue to remain higher within the FMCG sector. I think the rural economy which had suffered last year and still is now coming up I think that could see an improvement going forward in this fiscal year.