A degree of caution is advisable in sectors like railways and defence as rallies in both public sector companies and growth in government capital expenditure are rarely sustainable, according to Saurabh Mukherjea of Marcellus Investment Managers.
"I see challenges in the PSU space, and I see challenges in the whole government-related spending place," Mukherjea, chief investment officer at Marcellus Investment Managers, told BQ Prime's Niraj Shah.
How To Play The Capex Theme
Mukherjea said the capex in India had been a challenging theme to navigate since the country's liberalisation in 1991. Capex booms in the country have typically been short-lived and characterised by sharp and brutal fluctuations.
"I don't know when the next election is. Neither do I know the degree of consolidation that the government will have to push through," he said. "But it's not clear to me that this rate of government expenditure growth on defence, on infrastructure, on railways is sustainable given India's fiscal position."
The founder of Marcellus Investment Managers highlighted that this situation warranted a degree of somberness when contemplating the business-to-government theme.
Also Read: Indian Market Not Cheap But Still Offers Opportunities, Says Franklin Templeton's Ajay Argal
Where To Put Money
Mukherjea said that inflation appeared to have reached its peak in both the western world and India.
It doesn't seem likely to drop to 3% in the near future, but as long as it doesn't return to the high levels around 9%, it's challenging to foresee reasons for the Federal Reserve or the RBI to raise interest rates again, according to Mukherjea.
This presents an excellent opportunity to invest in top quality financial services companies as inflation has likely peaked and interest rates appeared to have peaked as well, he said.
Also Read: Is Small- And Mid-Cap Stock Rally Running Out Of Steam? Here's What Two Key Indicators Suggest
Something That Stood Out In India
Mukherjea said the economic boom in South India is a topic that hasn't received enough attention. He highlighted that the growth in electronic manufacturing services and the flourishing active pharmaceutical ingredient and specialty chemicals industry had primarily been concentrated in regions like Chennai, Hyderabad, and the Bengaluru-Hosur area. "It's an incredible boom."
According to government data, Telangana's per capita income doubled in the last five years, he said. As a result, stocks are now reflecting the price points at which these South India-based firms charge their customers. In some cases, these price points are approaching those seen in second-world or even first-world countries.
"We've recently built a large position in Rainbow Hospitals. This is a Hyderabad-headquartered company with 17 maternity care and pediatric care hospitals across South India," he said.
Watch the full interview here:
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