Can India thrive purely on domestic growth amid global tariff turmoil? Sanjay H Parekh explains

Economic Times

01-05-2025

Sanjay H Parekh of Sohum Asset Managers, says India is perceived to be in a better position amidst global tariff issues, with a potentially mild impact. However, caution is advised due to potential import vulnerabilities and export threats. The portfolio is domestic-heavy, overweight in financials, autos, capital goods, utilities, pharma, telecom, and metals, while underweight in IT and oil & gas.
A lot of sectors are in focus on the back of the news flows. Let's start with the OMC pack. We have the numbers coming in from BPCL yesterday and now we have the numbers for IOC and the numbers look great. Help us understand how you see the numbers as well as the sector view for OMCs?
Sanjay H Parekh: We do not have exposure in OMCs right now though we track it very closely. One issue is the uncertainty in terms of your profitability. As you would know, while refining margins are linked to global prices, marketing margins on a gross basis are based on the market prices, but the LPG under recoveries is still uncertain in terms of how much would be borne by the companies, how much would be borne by the government, it is still very fluid.
So, predictability of earnings now gets difficult. And then we saw the excise duty increase by the government. As of now, they are making very good spreads because the crude has eased off and you do tend to make very high marketing margins if the price is not reduced and we have not seen price reduction on a retail level. As I said, a bit of an excise duty increase was there; it goes to the government, yet the spreads are still very high. What we need to see is net LPG under recovery, whether that is a sustainable spread. Our problem is the uncertainty and not predictability in terms of the marketing margins and hence while the valuations are great, results have been good, but that is our discomfort.
What is the market call right now? We have done well for ourselves in the last month. Since the tariff announcement on April 2nd, FII money as well seems to be coming back. Does it seem to be tactical and short-term in nature or do you think the FII buying is here to stay?
Sanjay H Parekh: What is coming out is globally we are perceived to be much better off in this whole chaotic scenario in the world of tariff issues and our relationship is optically looking quite stronger with the US. Hence maybe, the expectation is that we would have a mild impact in terms of the tariffs for India. Having said that, it is still a very chaotic world. There can be a second order effect as well.
While the China-US issue will take time to resolve, it could have a lot of ramifications in terms of import vulnerability, and export threat in the sense that if we are importing somewhere in the world would China not try to dump there because the capacities are huge and in a lot of sectors. So, it is a very fluid scenario. We need to be a little cautious. And on the domestic side, earnings also are not going to be great. We have a weak earning season. We have seen some of it which are good, but now we are going to see what is going to come out also you see some disappointments. So, the expectation is earnings will be more flattish or there would be a minor growth. The key point now is recovery. Will we have recovery in this environment purely on domestic growth? Within this global chaos, I think that is one thing that we need to watch and there we do carry some risk and we need to be a little carefulStructurally, we are very positive because all the balance sheets are in good shape, but near-term valuations are more like fair value. There could be a time correction and price correction. Both are possible – 3-5% price correction and some time correction and some clarity on this global scenario because it is important for us as well.
What has been your own strategy right now? What is it that you have done in the past month, bought anything afresh, completely avoided something?
Sanjay H Parekh: Our portfolio is more domestic heavy. Overall, we are overweight in financials. We own larger banks and we like them and it has worked well for us. In the discretionary space, we have autos – both Maruti and Mahindra. In capital goods, we are positive and are overweight there as well. And then, we have utilities, mildly overweight on pharma, while being underweight in IT, we are underweight because we think the growth is going to be slow, so there we are underweight.
In oil and gas, we have some representation through Reliance, but overall, we are underweight. And then in metals, we are overweight in Vedanta. We have a big overweight in Telecom and own both Bharti Airtel and Indus Towers. So, overall, our portfolio is tilted towards domestic and is less global and it has worked well for us by now.
Within financials we have two of the news makers first one is Bajaj Finance and the other one is IndusInd Bank. With respect to Bajaj Finance, though the guidance is not looking that exciting and there is a bit of a profit booking on the stock, we cannot complain much given the fact that the stock is already up 25% on the YTD basis. As for IndusInd bank, who will head the bank next is the key question.
Sanjay H Parekh: Bajaj Finance, structurally is very good. Long term, if you take ROEs, growth, they have done phenomenally. It has run up quite well in the last three months and it caught up on the underperformance which it had in the past and hence some profit booking and to be fair their credit cost is higher than expected due to the changes in the ECL model. Certainly the Street would not like that while as early as Q3, they had said that they want to be in the range of 2% but it ended at 2.3% plus. So, that was a little bit of disappointment, but otherwise it is absolutely top class management and at the price, it looks reasonable. It has run up so that valuations are rich. The entry price could be a little lower and it will look very attractive to invest again from a longer term point of view. IndusInd Bank is the fifth largest bank going through a temporary pain and you will see change. All the right things are happening in terms of leadership changes. I suppose RBI is also very proactive and are handholding the senior management. We have seen some notices being put up by the management and confirmed by the RBI. They will work through it, navigate it, and we do not think there is a structural problem. There was certainly a pain in terms of the way they accounted for the derivative book or if there is any minor slippage in the microfinance book. But looking ahead, the size of the profit is still going to be very good.. They have done a lot of good things over the last 20 years and once the leadership situation gets better, which is when the right leadership team comes through, we are quite hopeful things will fall in place.
How are you analysing PSBs? You have got SBI's numbers over the weekend. Some of the smaller banks have given a positive surprise. The MFI segment continues to see pressure. Where do you think PSBs are headed next?
Sanjay H Parekh: We own SBI and we are quite positive. Only thing, in the near term, they could, because the repo rate cuts have happened and so the asset side repricing happens faster. So, as we have seen, it could happen that there could be some pressure on NIMs and NII which could be even not only for the coming quarter, but more so for the first quarter ahead. We think this would be a year of low growth. The franchise is very strong there with ROEs in excess of 16%, ROA is around 1%, they have managed the credit cost very well and we believe that this phase of repo rate cuts led pressure on NII is a temporary phase and longer term we are quite positive and it is available at less than one time on FY27 price to book. That is why we are positive. Other than PSU banks, we will prefer the largest name and we would have representation. We do not own the rest at the lower levels.