Current Pause In Market Akin To Pit Stop, Says Motilal Oswal CEO
With anticipated rate cuts and a higher weightage in emerging market indices, more investment flows are expected, says Prateek Agarwal.
The spotlight is shifting towards new-age sectors that promise substantial growth and innovation, according to Prateek Agarwal, chief executive officer of Motilal Oswal Asset Management Co., as he shed light on why electric vehicles, defence and renewables are emerging as the new spaces to keep an eye on, akin to the software companies of two decades ago.
New-age industries are stepping into the limelight with the potential to drive long-term growth and returns, Agarwal told NDTV Profit in an interview. The managing director emphasised that these sectors were not just fads but represent fundamental shifts in how economies operate and grow.
India's defence sector stands out as an area with significant potential, with Agarwal highlighting that the defence industry is expected to see robust earnings growth over the long term.
"To us, the current pause in the market is like a pit stop. Sometimes, the narratives become very strong. Maybe, valuation go a tad ahead or, maybe, let's say they rise so quickly that people get uncomfortable, and there can be a period of cool off," Agarwal said.
"But really speaking, we believe this is a space where 15–20% growth on sales should be delivered with a higher growth in profits and for a very long period of time," he said.
Prateek Agrawal (Source: NDTV Profit)
The renewables sector, particularly solar and wind energy, represents a significant growth opportunity as energy consumption should rise with higher per-capita income and focus on manufacturing. The valuations in this space have not yet fully captured the long-term potential, according to the CEO.
Agarwal also touched on the broader economic trends that support these investment opportunities. The depreciating rupee, historically a concern for foreign portfolio investors, is now seen as beneficial for profits, given that domestic flows are driving the current market rally.
The rise in capital expenditure is another factor contributing to a positive outlook. India's consistent foreign flows and increased weightage in global indices underscore its evolving status as a significant market, according to Agarwal.
With anticipated rate cuts and a higher weightage in emerging market indices, more investment flows are expected, enhancing India's attractiveness in terms of investments, he said.
While Agarwal does not focus on banking stocks, he sees value in insurers and capital market plays. This diversification reflects a strategic approach to capturing growth across various sectors while managing risk.
Watch The Conversation Here
Watch The Conversation Here
For an AMC to reach a milestone number of 1 lakh crores is pretty strong. Prateek, tell us one this growth, obviously, has come on account of this inherent belief within the Indian retail investor that the story will continue. Do you believe the story will continue?
Prateek Agrawal: Yes, we believe the story will continue. I think, more important, you know, if you flesh it out, if you dive a bit deeper into this, trends continue. You know, trends continue for many years. So, for example, 2000 to 2008 was the period of capex-driven growth. Capex intensity of the economy went up and 2008 to 2021 was a period of consumption-driven growth. Again, from '20-2021 onwards, we are seeing an increase in capex intensity in growth.
So, the point is, these trends last for several years. In the new trend, we are just in three years. If you test the trend for various events that happened over the past quarter or so in a new government coming in, with the first budget and all of that. I think there is reason to believe that the trend of capex-driven growth continues deeper into the future.
Okay, there were question marks around whether the new government in its avatar, wherein it's an NDA-coalition government of sorts, for the first time, will there be some checks and balances on the frenzied activity of capex that was there in the second term of the NDA? You don't find any concerns around that?
Prateek Agrawal: We don't find any concerns around that. If you look at the budgetary maths, very clearly for various reasons. Maybe, fertiliser subsidies are lower, etc, but subsidy as a part of the budget is going down, and capex as a part of budget, and hence, the GDP is strong. So, we think the trends continue even after that. Whatever we are seeing on the ground in terms of new ordering, etc, has retained momentum.
India for far too long in the recent 12 months, 18 months, for far too long, has been ignored in terms of foreign flows, despite the weightage moving up. Now that we are on the cusp of a central bank easing cycle, plus such a high weightage, do you think that draws in global flows, or do valuations become a hindrance and even passive flows will be hard to come? How does this unravel because to a normal mind, the normal mind would think that if the weightage is up, then at least the passive flows will be forced to come with the rate cuts?
Prateek Agrawal: If we look at FPI activity month by month in various countries, one shall find that while in India, FPIs have sometimes come, sometimes gone. But versus other countries, we have got more consistent inflows.
Now, FPIs have a basket, I mean, if you think of emerging market funds as of now, are a very difficult sale, I don't think the pool of money in emerging market funds is really expanding at a fast clip, so it is you know, reallocation of monies that is happening. So, in Feb. to April-May kind of a period, the Chinese market moved up 30% and money moved there, and we saw outflows after the Chinese market consolidated, moved down a bit. Things were again, normalised for us.
So, it is one thought. So, if you look at consistency of flows over the last one year, over the last two years versus most emerging markets, India has received more consistent flows on a monthly basis. If our weightage moves up, so yes, you know, when interest rates get cut, and people find emerging market is taking more competitive versus investing in their own markets, flows will come in and with that, monies will get allocated globally, and if our weight is higher, we should expect to see more money coming there.
Now, other markets are not performing well. It's not new. If you look at from 2000 till now, the only market which has proved in some manner competitive to the US returns to India. Other emerging markets, frankly, have disappointed big time. So, we thought today is whether we look at emerging market pack, and we look at India as a part of it, or increasingly going forward, we are ultimately now fifth-largest market by market cap, bigger by number of securities listed and sooner than later, over next one to two years, we would probably be the third largest market.
Can India become an asset class in its own right? You know, out of the emerging market basket? Ultimately, Emerging market baskets got created because every emerging market then was small and, you know, they needed a bigger pool of market cap, bigger pool of securities to entice global investors. Now we have become large enough in our own right. I think the thing to watch for is, can we become an asset class by ourselves?
Okay, Prateek, I know it's usually difficult to time these things, and therefore, I won't ask you to do that, but I just wonder if the nature of the winners, if the market were to move higher over the next 12 to 18 months would change with the nature of the flows, hitherto DII flows, a lot of bottom up ideas. Banks not doing all that well, despite the weightage, etc. Does that change in the next 18 months because of the nature of the flows? If indeed, the FII flows become maybe not as strong as the DII flows, but stronger relative to the past?
Prateek Agrawal: So let us look at reasons why FPI has come into an emerging market. You know, it is for growth because if you are seeking value, if you want to buy cement as a business and see, you know, how is the capacity priced? I think everywhere in the world, capacity may be priced lower than in India. So it is for growth. India, as a country, offers growth.
Now, banks, large IT were the growth drivers last time when we got very strong FPI flows. This time around, they don't seem to be the growth leaders. The newer growth leaders are what we believe will attract the active flows, passive of course, will go as per the index weightage and so on. Now in December of last year, we had one instance where, you know, yields dropped sharply in the West and you know, something happened to our market.
Now in the first month of that correction happening, it is the shorts which are getting cut. So, these spaces, which actually may not do very well over the next period, do very well because it is driven by shorts getting cut. So, in the month of December, you actually saw banks, and IT do very well, the large IT and after that, they have again continued to not do as well.
So, I think you know, if the yields abroad drop and there are rate cuts in the direction that gets more known, yes, flow will be there. Short covering will be there. That may cause a month, month and a half, of change in the sectors which are doing well. But if the reason is really short covering, then I think the current spaces, which are the growth leaders, should continue to do well.
Okay. Prateek, how are you as such a large AUM, under your belt now investing, because you mentioned that FPI has come for growth. I'm guessing you are investing for growth as well. But if anybody who's investing in growth for the last 12 months in financials, for example, hasn't quite made money, right? So therefore, do you take a contra view and not be as high, or be much lower than the benchmark weightage, let's say on banks. I'm not including the whole financials, because AMCs, brokerages have done well. It is banks which are sulking, particularly the private banks. How do you think of this as such a large AUM? How do you kind of navigate through this?
Prateek Agrawal: One, our AUM is not large. We are very small. So one lakh is the total AUM on the mutual fund side, it may be just 50,000 crore on the AIF, PMS side 27,000 crore, and the rest of it is passive, but yes, that said we are out and out growth investors. QGLP is the philosophy that we follow. We put a threshold that you know, any space that we want to be in, and this is a team effort that should be present on the space itself.
Growth opportunities 2-3% higher than what the index will deliver over the next three to five years. Today, if you see our portfolios as a house, we would be seriously underweighted, practically not present in staples, practically not present in large scale IT, very little into banks and this has been the position for the last one and a half years. We have gradually reduced it.
The money is taken from there, so banks, and IT is 50% of the index has gone to some mid and small. IT names, but more to New Tech, to spaces like renewables, spaces like electronic manufacturing, luxury consumption, etc, where the growth orientation is expected to be very high and in line with what we want to deliver to investors. So we are out-and-out growth investors.
You know, to our mind, we run some of the highest growth in earnings portfolios in the country. So yes, while we don't have banks, we do have some amount of insurance. We do have some amount of capital market presence in our portfolios. One more space that we have is defence. We continue to remain positive on these spaces.
The other is the need for new paper to come in as the market broadens and more and more flow sticks in. So, we've seen the New Age companies do really well, right? I mean, Zomato will be up 6% today on a JP Morgan note but the thesis that JP Morgan is putting out for Zomato, or some other houses have put in for some of the other stocks, is alive and kicking.
What's your sense of these new sectors getting created? We also now have an electric vehicle company listed, and there is more coming. So, what's your sense of the New Age sectors getting formed? Are you constructive here?
Prateek Agrawal: Very constructive, we may not own all of it, but we are very constructive. In fact, this is part of our thesis. We say this is time for alpha and this is a theme that we have covered and covered for the last several months. Just like, you know, if I give you a similar situation that happened in the past, just like software as a sector came into being in the mid 90s, and, you know, delivered huge alpha to managers over mid 90s to 2000 kind of a period.
You know, look at the construct of new space, not there in the index, large quantum of growth in earnings and five, six years of earnings growth on the trot. You know, delivered large alphas. In the similar manner, the newer spaces, like electric vehicle electronic manufacturing, are renewable, defence, New Tech, etc, are doing the same over the last three to four years, and the runway of growth continues to be long, and in many cases, getting stronger. So, we are very positive on newer age businesses.
Okay. So very positive there. Prateek, the other thing is sectors that have done really well in the last couple of years and now starting to take a bit of a breather. I mean, defence may be up in the last couple of days, but otherwise has now kind of cooled off from the frenzy that it was in. You guys have a Defence Fund as well, if I'm not wrong. How do you think about the story here, when the common narrative is that, yes, there is an order book, yes, there is execution, yes there is indigenisation, but the multiples are extremely stretched. So what do you think about it? Please explain.
Prateek Agrawal: So, we have a passive offering on the Defence side. Like I said, we are the largest passive strategy In House in the country. We continue to be positive on Defence, as I said that is a part of my comment. To us, the current pause in the market is like a pit stop. You know, sometimes the narratives become very strong. Maybe valuation go a tad ahead of or maybe, let's say they rise so quickly that people get uncomfortable, and there can be a period of cool off, but really speaking we believe this is a space where 15-20% growth on sales should be delivered with a higher growth in profits and for a very long period of time.
So we continue to remain pretty positive there. If you look at our active portfolios, practically all active portfolios, one should expect to find a defence name or two.
Okay, and I think about the last couple of questions before we let you go. The other thing is, much like defence is Power right and power across the space. I don't even think the finances may be expensive, but be that as it may, multiple ways to play ancillaries, hydro, thermal, green, what have you and the sector has rallied, but the targets are very stiff. So is that also in line with the thesis that maybe there is a bit of a pause and the rally could continue? How do you look at Power when you look at that very wide bucket?
Prateek Agrawal: So, let's say energy intensity of the economy stays the same. Actually, if we increase manufacturing as a part of GDP, energy intensity should be expected to increase. It shall increase also because, you know, as per capita rise, people will offer more air conditioning, and last summer, you saw air conditioners not being available at all. The shops were all emptied. So, electricity consumption should be expected to grow stronger than usual into the future.
Now, earlier, there were other sources of energy, you know, coal, oil, gas, etc. Now, as we become more green, a lot of this will get substituted by electric power. So you know, if you have, for example, all the two-wheelers and the increasingly electric cars, you know, you need less of other fuels. You need more electricity. So electricity demand will be higher from that count as well.
Here, I think the good, nice way of playing is through new energy plays in solar and wind. There, the one way of growth is long, and I think valuation doesn't capture at all, because the start was very sceptical. You know, how long will it continue? Single-use plants, you know, what if it runs out? But the thing is, now there is no going back. Increasingly, if you look at FDRE bids, they're competitive. They're getting more and more competitive to thermal, which means the future is all going to be renewables, or mostly going to be renewable. So I think that is one way of playing it.
The second way is, of course, to look at stuff that goes into, you know, suppose one is not sure whether coal does well, or wind does well, or solar does well, get into stuff which goes everywhere, something like cables, etc. is the other thought that we have, you know, control stations, etc. and that is what we have in our portfolio. But in these spaces, again, the longevity of growth is definitely there. Overall growth will be 7-8%, so that is significantly below the threshold we want. But in newer spaces, you know, solar, wind, etc, even pump storage, growth can be an order different, and that is where our interest lies.
By the way, as we speak, the rupee has hit a record low of 83.99. Now, is this the storm before the calm? Usually, it is calm before the storm. But will we start to see the rupee strengthen at some point of time in the near future, or do we continue to be weak? I mean, with crude falling, CAD improving flows, likely rate cuts on the anvil? Prateek, a macro question to wrap up this conversation, a word on the rupee and what could happen ahead, and if there are investing implications on the same?
Prateek Agrawal: So theoretically, with rising forex and everything that you spoke of happening, which is again positive for forex secretion, Rupee should strengthen. Meaning, you know, from close to 84 it should be closer to 83 or lower. But the point is, you know, forex is just one bit of the equation. Competitive intensity is another.
If we look around us and, you know, we compete with our neighbours in various goods, neighbours, you know, such as Pakistan, Bangladesh, China, on various items and if their currencies are not strong. Their currencies are weak. To some extent it becomes difficult to retain, you know, our levels with the dollar as well. I think that is what is happening, because otherwise our Forex are at a high every week, every month, we keep approving Forex. We have gotten included in the GBI Bond Indices, so those flows are happening, and we may get included in the Bloomberg Bond Index. More flows will come and so on.
But I think it is this competitive thing which is keeping the rupee weaker than where one would believe it should be. Now, a weaker rupee is good for corporate profits. Every manufacturing which competes with imports, you know, gets that much more protection and so on. So depreciating rupee is good for profits. What is good for profits is good for the direction of the market.
In the past, when currency depreciated, markets fell because FPIs were a large part of our market activity, and in the thought of protecting dollar returns, you saw rupee weakening, also coinciding with a lot of FPI selling. But now, since FPIs are a marginal part of the overall ecosystem, it is our money which reflects our fundamentals and markets and I think small rupee depreciation should be taken at the positive for the market rather than negative because it is positive profits.
