“Previous calendar year was a year when many companies bore the brunt of inflation after the Russia-Ukraine conflict started and commodities rose,” says Kunal Pawaskar, Tata Asset Management.

At your PMS at Tata AMC, how are you observing the earnings quality so far because our observation was that largely earnings are actually pretty good. In fact, in broader markets they are better than largecaps but it is the top line growth which appears to be the weak spot on aggregate. Are you worried about the anaemic top line growth or revenue growth?
In fact, just today morning I was looking at the earnings data and if you look at the results released in the December quarter and whatever is released to date from the BSE 500, the median PAT growth is coming somewhere around 15%. You are right in saying that the top line growth is slightly moderated. I think this was not very far from expectations. Previous calendar year was a year when many companies bore the brunt of inflation after the Russia-Ukraine conflict started and commodities rose.

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It hit profit-loss statements across the board in many sectors and in the last year we have basically seen a lot of that reversing. So, this is not too far away from where we were expecting things to be. And we are not as worried on the top line growth. Again, that is at a broader market level. We will be also very interested in looking at what we own and what is it like there.

I see some very differentiated views or moves which you have done in your portfolios. I see a name from the FMCG space, one of the turnaround candidates. FMCG in overall, I would say, especially the consumer detergent space and like many other categories last few quarters were low on volumes because of inflation or what not. But early commentary from some of the sector majors seem to be suggesting that things are turning around on rural and tier II, tier III side. Would you agree with that? Are you comfortable in raising stake probably that is why I can see a consumer detergent name in your portfolio?
Correct. In general, we like situations, we like participating at the ends of the spectrum where changes are happening and you are able to pick things which are maybe under a cloud of pessimism, earnings may have slightly slowed down for whichever reason.

In some names, we were able to participate meaningfully in including this one. There was commodity pressure in that current year something that I referred to when we spoke about the first question and that is on the mend.

So, whatever we saw which was very transitory in the year of 2022 reversed. So, you saw healthy gains. Rural side of things has to improve a bit. I think that may take some more time, but instead of looking at pockets where growth is healthier than the rest of the pack and I think that is where we focus on. So, at a sector level, there is a bit of slow growth in FMCG. I think some of that should pick up in some time. What are your thoughts on capital goods? You have almost 16.5% allocation to capital goods. What I want to understand is that this is a completely area which everybody knows about, discovered, we know the size of the opportunity, tailwind is pretty large. How are you analysing the valuations versus earnings which some of these companies are posting?
Thanks for pointing this out. It is a sector we like. We have been writing about this, in fact, in our communication for multiple quarters now. In fact, more than even one-and-a-half years ago we took this chance that the investment cycle in India is shaping up well, that one should be participating in this. We effected changes to the portfolio in that direction too. So, weightage towards capital goods area increased, manufacturing area increased.

We do take a measured view with respect to valuations, as you rightly pointed out. So, within capital goods, where valuations have hinged up beyond maybe your comfort level, we have even taken exits in the preceding calendar year 2023 and at the same time even after those exits were done we have even added more into some of the areas which derive growth from capital goods.

So, valuations are definitely more more than they used to be. But what I find interesting in the entire space has undergone a period of almost neglect for the preceding decade in the 2010 to 2020 period. There are many companies which literally are coming out of the woodwork where expectations were low and I think even right now there are pockets where I think there are interesting situations even right now in capital goods and the interesting part about this space is that we as an investment community and even our clients, I think what we are going to see is surprise that continue to come from that space.

Power, I want to understand, there are some power generation legacy companies also in your portfolio which are now talking about listing their green arm, but I want to see your views on the overall power value chain. Traditional legacy companies who have green arms or some of the renewable companies recently got listed, some turnarounds there, or generation related power transformer type of companies or cables or wires, heavy cables. How are you approaching the entire value chain or do you have a basket approach here?
There are areas we have been getting into power sector from the last 18 to 24 months. We have increased exposure in the current year 2023.

The country wishes to move forward in the manufacturing area. We need to have a stable power demand-supply environment. I think if you look at stats, so around 10 years ago and these are figures from the government websites, the installed capacity addition used to tend at 10% year-on-year growth, that number when we came into the 2019-2020 period, even before COVID happened, that number was around 3% mark.

So, we slowed down in terms of installed capacity addition and that is happening now. Also, we should see this in light of the reforms that are happening in terms of improving health of the distribution companies because when smart meters get rolled out and that number of 25 crores over the next three years, billing gets better, losses come down.

If the health of the distribution companies improves, they are able to pay the generation companies on time, generation companies can set up capacity that the country needs.

There are opportunities in the power financing area, the generation companies too, and a lot of things that plug into and supply. So, we participated in, I think, across things because we just liked it so much at the top-down level that we thought we should participate in multiple areas within power and we have done that.

Which to your mind is the most undervalued and ignored space in the market where risk-reward is looking attractive because most of the negatives are already priced in now? Is it chemicals or any other?
It is a good one. Valuations have been rising across the board in the last six-eight months, there are pockets in chemicals I would agree with you there, there are definitely pockets in chemicals.

I think some things on the textiles area may be still even interesting, though I think the earnings have bottomed in some pockets in the last two-three quarters, but I think there is more to come there.

This also aligns with our view on the manufacturing side, labour intensive manufacturing is something I think that our government is taking steps on and this should help us in the coming years.

So, these are pockets which typically don’t attract, they are not up there in the headlines all the time, so textiles is a large employment creator even today, but I think there is more that can happen here in the future.

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