Businesses engaged in energy transition, data centres, high-voltage direct current power transmission and premium auto ancillaries will witness notable profit growth over the next five years, according to Rajesh Kothari, managing director of investment advisory firm AlfAccurate Advisors Pvt.
Housing finance, building equipment like wires and cables, the contract development and manufacturing organisation side of the pharma business and mid-to-premium real estate will also be attractive in terms of earnings growth, he said.
"For each sector, you need to do segmentation and identify those companies that are positioned to capitalise on the growth and then position the portfolio," Kothari said.
When it comes to real-estate companies, he explained that the key parameter to judge a company is the inventory-to-sales ratio and the project pipeline for the next three years.
"From pipeline to inventory and then to consumption, that drives the pre-sales, which moves the Ebitda (operating profit) and impacts the stock price," Kothari said.
The firm avoids investing in oil marketing companies due to the high level of risk associated with volatile and unpredictable nature of crude oil prices, tariffs and government policy on petrol and diesel, he said.
Watch The Conversation Here
Here Are The Excerpts
I'm going to take a leaf out of what's happened, the recency bias in the markets to start off the conversation. On the global front, with BMW and some of the other automakers sounding the caution bells, people are talking about the same when it comes to four-wheeler inventory in India and what are the kind of discounts on offer during the festive season, something that we probably haven't seen since 2019. Are you sensing Rajesh, that urban discretionary consumption, or urban consumption at large is slowing down. Is that indicative of what could happen to the economy?
Rajesh Kothari: I think there are pockets of consumption which are doing extremely well and there are pockets of consumption which are, I would say, a little bit moderating and there are, of course, pockets of consumption which are still not yet improving. They're still at a slow rate.
I think what is happening is that the Indian consumer, the entire wallet, they spend on quality, is changing. There is not a macro thing that consumption is slowing down, I think, that will be a wrong judgement.
For example, if you look at the entire car industry, the premium end of the car is going extremely well. The problem is that, I would say below 10 lakh, or even a little bit on the mid-side, but the premium car set is being extremely well.
If you look at the real estate registrations, they are doing extremely well and within that, if you look at the premium real estate, it is doing extraordinarily well. So, I think there are basic patterns which are happening, the wallet of the consumer is changing, and the companies, which are rightly positioned to those wallets, are basically becoming gainers because that the profit pool is expanding disproportionately.
So, I think it's less to do with the judgement in terms of the overall economy, but there are pockets which are yet to improve and there are pockets which are strengthening.
Right now, we're talking just about urban. Rajesh, you believe that I'm not even focusing on rural, or maybe you take an overall consumption, because the common belief seems to be, or the sense that I'm getting when I'm doing these conversations, is that a rural is making a comeback, and urban is slowing down. You are saying that that's not necessarily accurate across the board?
Rajesh Kothari: Sure, it is not necessarily accurate because the urban, as I am saying, every pocket, whether it is rural or urban, there are pockets which are doing well. There are pockets which are not doing well and that keeps changing. Wallet share is changing, and therefore, is very important to understand because ultimately please understand, we all need to finally decide which of the companies which are rightly positioned for those profit pools.
If you have those companies, while constructing a portfolio, you will do well. If you are on the other side, definitely you will not do well. So macro broad indicator, I think there is nothing like that.
Consumption is slowing because then what is rural, what is urban, what is semi-rural, what is semi-urban consumption, all are very loose terms. I don't think there are any indices by the government which says that urban consumption versus rural consumption.
I want to talk about this argument that you make very correctly about profit pools, and so identify for us, according to you, where are the two or three or four largest pools of profit available over the course of the next five years, and which businesses are probably primed to take advantage of those profit pools?
Rajesh Kothari: So one is, of course, the energy transition, the green side of energy that is one of the largest, I would say, incrementally growth perspective is one important segment. Second important segment is a data centre-related capex and when you put one data centre, roughly 40% of that cost goes for electrification. So, it means all types of electric conditions, which gets what, be the transformers and so on and so forth.
The third important segment is, you know, the HVDC part of the power transmission. One is normal power transmission, like normal consumption, there is a normal power transmission. But then there is a HVDC-related transmission, very incrementally, significantly high growth going to be into that part of the segment.
When it comes to the automobile and auto ancillaries, the content per vehicle, the disproportionate increase there, be it air bags, be it sensors, be it automation, be it alloy wheels and premiumisation of that content. When it talks about the consumption side of a company, which can meet the aspiration at an affordable price.
There is a huge demand, but at the right price point, and there are only one or two or three companies which can meet those aspirations at that price point. These companies are growing by 25%, 30%, 40%. They are not complaining about any slowdown, be it rural, be it urban, be it semi-metros.
When it comes to the pharma side, the CDMO side, the huge profit pool opportunity over the next three to five years. So there are companies which are rightly positioned to capitalise on a return on the U-turn in the U.S., companies incrementally spending more on the R&D.
If you talk about, for example, the building materials, the wires and cable side. Over the next two-three-four years, you will see more growth on the wire and cable side. If you talk about real estate, there are pockets where the premium segment will not be affordable.... the mid to premium segment is growing disproportionately, which is another profitable opportunity.
If you talk about banking, housing finance is a big growth opportunity compared to the normal banking trends. For each sector what I am trying to say is that transition is that, for each segment, for each sector you need to do segmentation, and then within each segment, which are the right company's position to capitalise on their growth and position your portfolio accordingly. It will make a significant amount of wealth over the next three to five years
Now a lot of views around how the near-term profitability of the oil marketing companies, for example, will look very solid as a result of this fall, particularly companies which have a lower refining and a higher marketing piece within that. There are three names out there, so I'm not going to ask you about stock ideas out there, but just trying to understand, are you constructive about oil marketing companies because of this crude price fall, which looks slightly more structural, or would you avoid them? Why or why not?
Rajesh Kothari: As you are aware, we strongly believe that we should focus only on a constructive portfolio in the companies where we have some competence to predict the earnings power. So we do not buy oil marketing companies. Generally speaking, we avoid this entire basket because we believe we cannot predict the crude oil. It's just not about crude oil, it is also about the tariffs. It is just not about the tariffs, it is also about the government policy of petrol, diesel prices.
Now, all these things are beyond anyone's ability to predict, and therefore we continue to avoid buying this space. There are enough opportunities available in the market. While people keep talking about valuations going on time high. But there are enough opportunities in the market, even at the current valuations, where there are companies which are growing 18-20-25%.
Think of it, India's largest company. I mean Reliance Industries in AGM, put a disclaimer, we do want it. In the AGM talking about doubling the Ebitda in four to five years. This is one of the largest brand companies in India, and is talking about doubling Ebitda, I'm not talking about mid-cap. I'm not talking about small-caps or micro-caps. So you can imagine the kind of growth opportunity available for many companies is pretty large, is probably significantly larger than what the market is probably expecting the consensus estimate.
That's why the market is not falling to that extent, because the market is looking at the future earnings power, and those are the all-new growth drivers. Those are no more traditional drivers, and they are growing disproportionately.
These new growth drivers, they are not growing 10-12% compounded. They are growing 20-30% compounded. So for any company, if that new growth driver is going to become 25%, 30%, 40%, 50% of their business over the next four to five years, then your overall growth gets higher from 12% to 18% and increases the valuations. We are still at almost equal to 10 years average valuations.
I heard you mentioned companies which are in the mid end of the housing segment, right? I'm trying to ask you, if you had a question to ask to a company which is engaged in that business, what would that question be? What is it that you would want to know from a company which is doing that, which has increased the base over the last three years? What is that one thing that you would want to know from such a management?
Rajesh Kothari: For any real estate company, there is only one question, what is the current inventory and inventory to sales ratio over the next three years, at the industry level.
I am talking about a particular region, for example, you are talking about Brigade, then we should ask the segment they are into, say, for example, Bangalore, how is the inventory of the industry is moving, and what is in the pipeline? The pipeline to inventory to consumption. This basically drives the pre-sales and the pre-sales moves to Ebitda over a period of two, three years and that's what basically moves your stock price.
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