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Meanwhile, pharma, renewables and telecom are the three sectors to see a sharp rise in earnings in a , it makes more sense to play a dedicated India theme.
What according to you would be the highest earnings growth sector from here on because whatever PE expansion had to happen in the market may have already happened. Now, the performance of a stock will hinge on whether earnings can catch up. Which are some of the areas where you think earnings can grow quickly?
Pawan Parakh: We just discussed a couple of sectors. Pharma is one sector because if we look at a lot of these pharma companies, all of them have got a few blockbuster molecules in the pipeline which will lead to some very sharp revenue growth for all of these names, not only for this Q1 but at least for next one or two years.
So, pharma is one sector that is on top of my mind. Within industrials, if you look at some of these sectors like renewables, and some of these subsectors like automation, these are companies that will benefit not only from revenue growth but also from substantial improvement in margins because of the operating leverage that they are seeing.
It is not specific to Q1 but going ahead, taking a one-two-year view, telecom is one sector that will see multiple tariff hikes, so that is one sector that will once again see a very sharp up-move in earnings. While a lot of these sectors witnessed sharp growth in earnings, that also coincided with a decent amount of cash flow generation.
What about telecom? Which end would you like to have as a resurrection play or established company or as a part of another larger giant?
Pawan Parakh: Mr Sunil Mittal of Airtel has on multiple occasions for many years been highlighting that the industry needs at least Rs 300 ARPU. The last reported ARPU is closer to Rs 210. So, we still have a Rs 90 rise which is a good less than 50% upmove to be seen in the next one or two years.
If the entire telecom industry were to benefit from such a sharp increase in ARPU, it makes more sense to have a dedicated play on telecom. Secondly, the companies to benefit will be the key beneficiaries of this ARPU. Some of the companies in this sector have got either exposure to international telecom or non-telecom businesses or maybe non-retail businesses, say enterprise, and others or maybe are a part of a big umbrella. So, it makes more sense to play a dedicated India theme.
One more thing that needs to be highlighted here is that despite we are talking about 5G, a good 20% or more of the Indian telecom user base is still in 2G. As and when that 2G base migrates into 4G, 5G, there will be organic growth in ARPU which will benefit a lot of these telecom companies. I would rather go for a dedicated India play and companies that will benefit from this shift from 2G to 5G or 4G.
How are you playing the defence theme?
Pawan Parakh: We, already played it in my earlier role honestly and in my current portfolio as of now, we do not own too much of defence. But the only reason why we do not own defence is that we are not very comfortable with the valuations. A lot of these companies are trading at phenomenally high valuations, that we have not seen in many, many, many years.
But having said that, if we get a good correction, we will be buyers into this stock. This is a multi-year story for us. India has very clearly shown that India needs to be atmanirbhar in defence and this is visible in the consistent efforts that the government has been doing both on the indigenisation side which is actually to some extent substituting the imports or making more of a collaborative approach wherein India is also benefiting.
India is not only doing offset work but there is also some sort of a technology transfer that is happening to the domestic players. And on the other hand, very clearly, the government is committed to export and time and again we are displaying that by striking deals with Southeast Asian countries and a few other African countries also.
So, this is a multi-year theme. It is no longer a sector of the past wherein you did not know what was supposed to happen out here. But once again, valuation is something that we are not very comfortable with. So, we will chip in at the right time, but nothing for now so far.
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(What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price