“It may prevail for a couple of more quarters as well but these are the new high growth emerging sectors, the QSR especially the very high growth emerging as category, they will have a very superior growth for a long period of time and because of that I think it is a good time to buy,” says Sampath Reddy, CIO, Bajaj Allianz Life.

The one thing that stood out in the earnings so far and I would like your thoughts on that is that the earnings, bulk of them coming so far appear to be coming on the margin front and the profitability front. The top line growth of corporate India continues to remain slightly on the softer side. Is it a bit of a worry for you or do you see, going forward, top line growth, which actually is a reflection of demand actually gather pace in the coming quarters?
We have to see the earnings in the context of, two years of very strong earnings growth, I mean in FY23 and also on the FY22, you have to recall, the earnings have grown almost 50-60% both the years taken together. On that strong base this year earnings are likely to grow in the region of about 14 to 16% for FY24 as such.

So based on that strong base effect of last couple of years, I think 15 to 16% earnings growth is quite good. Yes, within that, earnings growth also mostly coming from the margin expansion.

Some of it is because of softer commodity prices because whether it is aluminium or steel which were strong for a couple of years back. And even the crude also been quite stable for the long period of time. So because of that, I think there has been a positive tailwinds in the form of looking at the margin side.

So some of its growth is actually coming from the margin side as well. But net-net about 15-16% earnings growth is coming this year. And the robust earnings growth in the last couple of years, I think, is a good outcome.

Going forward, FY25 and 26 also at the moment consensus estimates are in the range of about 12 to 14%. I think that is still reasonable in terms of earnings growth expectations. Only challenge is overall the valuation as such. The valuations have moved up a lot in the last couple of years, I think that is the only worry for the market in the near term. But otherwise, growth story continues to be very strong.
Okay, I want to understand from you what is happening in the hotels and hospitality space. The numbers have been very strong. Do you see value or even from here on, which phase of the cycle are we in hospitality in your view?
I think hospitality as a sector has been a huge surprise for us. And especially if you look back and see the ARR for the hotel industry as such, it was very strong about a year back.

All of us thought that it is more like after coming back after the two years of low occupancy and low rates. I mean, it is sort of cyclical upturn coming out of the COVID slowdown. But it looks like from there onwards also, the hotel rates kept on moving up.

When I believe nowadays the vacancy you do not get a room less than 30,000 so the rates have gone up a lot. And I think the demand continues to be very strong and it has been a huge positive surprise.

I am not sure whether these rates will remain at this level for a longer period of time. But at this juncture, they are positively surprising in terms of the overall upward movement in the ARR because of which the profit growth will also be quite strong.

Not sure how long will this prevail. So I will not decide the hotel stocks’ valuation based on the current level of profitability, which may not be sustainable. But if you are just for this cyclical peak in terms of ARR, how the profits look like, how the valuation look like, that is how one has to look at the hotel stocks.

At this juncture, we really do not have a strong opinion on them. But yes, the sector is I would say at a very-very good position in terms of very near term earnings.

I also want to understand which part of the PSU pack do you see good valuation upside even from here or where do you think things are getting baked in fully? We have PSU banks, engineering, PSU oil and gas, PSU.
I think for PSUs rail and defence sectors the valuations are really, I would think, fully baked in or probably gone to the higher end of the valuation zone.

Where the valuation still look probably attractive are, I would think, oil and gas as a sector.

PSUs in the oil and gas as a sector still valuations are reasonable. And even the BFSI space, not necessarily that NBFCs which are relatively new ones.

But, PSU banks as such, still the valuations are not very expensive. I mean, historically, the valuations of the PSU’s have traded relatively attractive or a lower end of the market spectrum.

But even at an absolute level, PSU banks are still reasonably valued. And also, the power sector as such, valuations have expanded a lot, especially the clean energy power generators and even the transmission, etc. But, to see the attractiveness, very few pockets of PSU, there are attractive valuations which are prevailing.

Are you comfortable right now getting into one area of the consumer space, QSR, has not moved a whole lot. Some of the FMCG companies, volume growth has been very anaemic. I think the only thing which is in favour is the valuation, but visibility of return is not very high. Would you nibble there?
I think the overall consumer as such, the earnings growth has been muted, even the volume growth has also been muted. But to give the credit, the valuations have also corrected in the consumer sector, but especially in the QSR they are also going through the very weak demand situation for the last couple of quarters.

It may prevail for a couple of more quarters as well but these are the new high growth emerging sectors, the QSR especially the very high growth emerging as category, they will have a very superior growth for a long period of time and because of that I think it is a good time to buy. Last couple of quarters have been a very poor growth for them and even does not look anything great for the next immediate quarter or a couple of quarters, but these are the time to buy such good quality franchises for a long term growth potential. The valuations at this juncture would be very-very attractive. I think the timing point of view, this would be a good time to get into this side of the space.

You must have seen the way industry leader in the agrochemical, speciality chemical space declared the results. In fact, many of them are actually talking that there is very little visibility when will things turn around? Would you venture in that space, agrochemical, speciality chemical space selectively or not yet?
I think as a chemical as a space I would be a little cautious. I mean, last three-four years they have had a very good earnings growth and people thought that it is more of a structural in nature but I would have my own doubts. It could be largely cyclical upturn that could have led to the huge growth in earnings. At the end of the day most of the products are I would think more commodity in nature.

If you see, if you recall, most of the API and chemical companies were trading at a much superior valuation to, let us say, that of a formulation companies in the pharmaceutical sector, that was never the case in the last 15-20 years.
So, just that last three-four years they have had a stupendous earnings growth, maybe because of the China supply related issues or whatever could be the reason and that is when their valuation got re-rated significantly higher.
I would prefer to play the pharmaceutical of generic exporters rather than the chemicals and speciality chemicals at this juncture.

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