Do you have any thoughts on some of the other sectors like roads, railways, urban infrastructure housing etc. in light of the incentivised investments made by the government? There have been the PLI schemes as well and even the Aatmanirbhar Bharat initiative is all set to benefit a host of these sectors. Your thoughts?
Housing is interesting. What people do not realise is that the housing sector is almost about a quarter of total capital investment that happens in the economy. It has been a soft spot for many years. But record low interest rates and tax breaks etc. which have been given both at an individual buyer level as well as to developers to get the real estate cycle moving, is something that we would tend to be positive on incrementally.
There is a part of the capex that we are more positive about happening in real estate rather then the private corporate sector at this point of time. The other interesting area would be automobiles. It has been through a very difficult cycle for automobiles, going back all the way to the festival season of CY2018. In three years, volumes have gone negative. We still think that there is a structural growth story in automobiles in terms of demand that is likely to come from consumers as they move up the income cycle and look to improve their quality of life. The automobile aector is likely to benefit from that and hence the structural story is still intact. The three-year adverse cycle is creating a good opportunity to position for demand normalisation there and that is an area we like.
The domestic healthcare and pharmaceuticals sector has done well in the last one year but it is coming through after two-three years of intense pain. They have had to readjust their business structure. The domestic opportunity remains very attractive but they ran into significant challenges on the pricing side and the generic markets globally and also with quality related issues, one by one, we are seeing companies addressing these challenges and getting past them.
These companies are globally very competitive. It is one of the few sectors in which we will find a large number of Indian companies globally competitive. So again, we are quite excited about the entire pharmaceutical plus healthcare space along with automobiles and real estate.
Is pharma a space you are not so bullish on or do you feel it has just topped out?
As I said, pharma and healthcare is something that we still like. We find the domestic market opportunity still very attractive; it is highly profitable and has got very good growth characteristics. It is just an unfortunate fact of life that as incomes go up, we get more and more chronic lifestyle related conditions which require a lifetime of treatment.
So this is a good growth opportunity for the domestic companies and added to that is the organised sector of healthcare which is the whole hospital diagnostic place which has growing on the back of spending ability and the development of the health insurance sector.
So we are quite positive on this domestic healthcare space and as I said, the export end of that had been challenged by safety issues and quality issues as well as by pricing issues. We think the worst is sort of behind on that front as well. So this is a sector where we would stay incrementally positive in the medium term.
Within financials, what is the strategy now? What kind of parameters are you applying when it comes to the financial basket?
Financial has been the bellwether of this market. It is the largest sector in the benchmark indices but it has obviously gone through a difficult period over the last year-year and a half, particularly because of the pandemic. But just two-three quick points here; this is the first time in almost 20 years, I am actually seeing that a handful of banks have been proactive in terms of providing for potential losses. Remember they actually started providing for losses in the March 20 quarter when the pandemic had just about hit.
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Secondly they went out and raised capital as a pre-emptive measure to strengthen balance sheets.
Thirdly, many of them have built excess buffers within the P&L. We have not seen this kind of behaviour from some of these banks in the previous credit cycle of 2013-2015 or even in the late 90s credit cycle. Typically the attitude was deny, deny, regulatory forbearance and then wait four to five years before you start to clean it up. Now some of the points that I made may not be true of every bank within the sector or every financial lending institution within the sector but certainly it is true of a handful of those institutions.
So while at a sector level, it is hard to get dramatically overweight, given that the sector is already 32% of the benchmark, we are very confident that there is a strong consolidation story that is going to play out. Some of these institutions navigated the credit side and asset side risks well over the last one year. They have built their buffers, they have got high capital adequacy and they have got the trust of depositors or they have got the trust of the bond markets.
The case for incremental growth accruing to them is far stronger than anything I have seen in the last few years. One has to be cautious within that aggregate sector because companies are very different but there is a handful of five or six banks where we personally and many of our funds are invested in with a strong active weight because we think these guys are going to come out of this difficult period with their foot on the accelerator, better margins and gains in market share.
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