S Krishnakumar, Director, Lion Hill Capital, says in the capital goods and industrial space, the execution has been good and hence, these sectors could be in for better performance in the fourth quarter. IT, pharma, diagnostics, metals, and commodities broadly would be low growth and could disappoint broadly speaking.

Let us begin with the market setup itself. We are fairly excited that the Nifty closed above 22,700 and the Sensex above 75,000. Do you think it is a realistic expectation to expect one lakh on the Sensex within the next 10 to 12 months?
S Krishnakumar: The markets have been trending very positively over the last year and particularly with the election uncertainty behind us, in some way the market is thinking that it is a one-way street for the existing government. So, the risks are not seen or discounted yet basically in terms of some of the other macros that could take stage. Global growth is just a little bit wobbly. Inflation is still sticky and central banks are pushing the rate cut cycles a little longer. So, there are uncertainties that one has to be aware of and further the valuations at about 21 times FY25 on the Nifty per se does not leave much headroom in the near term.

So, I do not think it is appropriate to expect a one lakh on the Sensex in the near term of a year, probably over two years is where we would get there. Given the current index levels. we are expecting a single digit return toward the end of the year from 22,700. So, that would be the broad construct and the broader market again trades at a premium valuation to the largecaps.

Hence, opportunities are very rare to come by where there is a lot more comfort in valuation. It is a market which is well priced in my opinion.

But we are at the cusp of the earnings season which could perhaps be the next trigger for the markets. What are your own expectations in terms of which sectors can probably surprise us and which are the ones which have more room on the downside to disappoint?
S Krishnakumar: As we head into the earnings season, we have seen a lot of news flow about slowdown in various sectors and we have the good base of last year’s fourth quarter. So, the earnings could be a little muted in terms of high single digit for the largecaps aggregated per se and we should be not expecting a blockbuster quarter, but probably a quarter which is reasonably muted.

Within the sectors that could surprise us, auto ancillaries, hotels and hospitality are the sectors which have been doing well and where there is earnings and driver momentum in terms of different metrics which help these companies. If you look at also the capital goods and industrial space, the execution has been good and hence, these sectors could be in for better performance in the fourth quarter. IT, pharma, diagnostics, metals, and commodities broadly would be low growth and could disappoint broadly speaking.

As far as IT is concerned, it is in a bit of a secular stagnation. While there are opportunities in new tech companies dealing with digitalisation, generative AI, etc, Indian companies are not as much at the forefront in those technologies and hence we should probably be a little bit more careful on the listed space at this point in time.

But the other big transition which is underway right now is energy transition. The entire shift towards renewables. We also have that e-commerce and digital side of things picking up, as well as the entire manufacturing theme. These are the big megatrends that we are witnessing right now, which might be at play for the next 5 to 10 years. But in terms of stock specific action, how can investors play these megatrends?
S Krishnakumar: While it is always great to see the trends that are emerging, the opportunity in the listed space may not be quite as wide as one would expect. So, with the limited availability on the listed space, the valuations of some of these companies in the renewables space or if you look at the EMS space are definitely quite rich and capture the next three-five years of growth too. We would be definitely looking at these areas with interest, but I think we need to be waiting for the right opportunity to get in. If you do remember the multiplex space, for example, the valuations were very rich when they came in with PVR and Inox and then they went through a multi-year correction before investors could really buy with conviction and valuation comfort and now it is a big story again.

So, all the spaces, the new sectors and trends would go through this kind of a big euphoric valuation, followed by some correction on consolidation on timeline and that is the time when you should be probably looking at it basically. But if you look at the manufacturing side, ex of EMS, there is a lot of opportunity that has emerged with the government’s push and also the fact that we are displacing or we are taking market share globally from China.

If you look at engineering, textiles, automotive, forgings, castings, and also some of the products on the product side of the capital goods, we are seeing good exports coming through. So that is the space where one can look for trends which is a part of the manufacturing space which could be more comfortable on valuations.

What is your view on the two divergent sectors – real estate which has been in an up cycle and on the other hand, chemicals which has been in a bit of a down cycle?
S Krishnakumar: What happened in chemicals is a bit of a one-off where we had a big growth in earnings which came from inventory valuation and also the fact that the disruption globally and valuations really shot up considering the kind of delta in earnings.

But things have settled down and chemical space is settling down to a moderate pace of growth and I think valuations have to correct a little bit more to get more interested in speciality chemicals too.

In real estate, are in a big bull market in terms of the cycle. It happened once in a decade and we are in the positive sense of the up cycle. Given the kind of job creation and investments happening in the economy, we see a lot of demand for housing continuing to pick up across the board in various metros and tier II and commercial occupancies also kind of improved very well and rates are going up. So, we see real estate as one space where the cyclical uptick could sustain for another year or two and we should participate in that appropriately.