Time to be a bottom-up stock picker; 3 sectors to hide in now: Aniruddha Naha

Economic Times

07-05-2025

Aniruddha Naha, Senior Fund Manager -Equity, PGIM India Asset Management, suggests that while midcaps are pricey, small and microcaps offer opportunities with cleaner balance sheets. He highlights potential in capital goods and chemical companies, particularly agrochemicals, due to completed capex and normalizing inventory levels. While wary of Chinese dumping policies, he anticipates a turnaround, especially with favorable monsoon predictions for domestic-oriented agrochemicals. The financialization of the economy including banks could be an interesting place to hide in and while chemicals and agrochemicals have not participated too much, earnings bottom of the cycle seems to be getting in place and could probably be another interesting place to be in.
After the rally that we saw in the markets in the last few weeks, we are up almost 10% in the last one month, we are seeing a bit of a breather coming in the markets. Now there is some news coming in on the tariff front also, specifically on the pharma front, and the way the political angle is playing out. Do you see a bit of a caution in the air right now? Is this not the time to throw caution in the air and be a little more conservative right now?
Aniruddha Naha: Generally, what we track is data against sentiment. Frankly speaking, it is turning reasonably positive both at a macro and then at company and micro levels also. If you think of it, we remain reasonably positive, but for the geopolitical tensions that are going to play out, this is something we will not be able to model and hence it is a binary event. But if you look at data points, frankly speaking earnings have started picking up, rate cuts have happened in India, the currency has actually strengthened, the RBI has put in a lot of liquidity. So, from a macro perspective, lots of things have changed for the positive. Stocks earnings have started turning positive. The only thing that has turned negative and that is primarily driven by sentiments is the human emotions that are involved. Last year, they were extremely positive. This year we are reasonably conservative. We usually like such scenarios where data is positive and sentiments are cautious or negative. It is a great time to go ahead and build portfolios. But where do you sense the margin of safety in these volatile times because the markets are giving moves both ways and we are witnessing a lot of volatility for the past four to five months., but which are the sectors that are looking attractive to you?
Aniruddha Naha: Clearly, pharma is something that we remain positive on in spite of the news around tariffs coming through. Our belief is even if the tariffs come through, it will not be disruptive and a large part of it will be probably borne by the insurance companies in the US rather than pharma companies sitting out in India. The financialization of the economy including banks to that extent could probably be an interesting place to hide in and chemicals and agrochemicals also have not participated too much, but the earnings bottom of the cycle seems to be getting in place so that could probably be another interesting place to be in.
Talk to us about the consumption theme because we have been talking about the consumption picking up. Now with the rate cuts coming through and the liquidity infusion by the RBI, how do you see the consumption space? Also, which part of consumption do you see value in? The discretionary end is something analysts are betting on and within that, what are the pockets of value for you?
Aniruddha Naha: We believe discretionary consumption is a reasonably long-term trend in India and will basically follow your per capita GDP increases which happen over a period of time. In the near term, there are a lot of pockets which look interesting over a longer period of time. Near term valuations and a little bit of a slowdown that we have seen in the last six-nine months have made us very choosy about what we go ahead and buy out there. So, something like buying into music is something that we believe, a low-ticket discretionary item, is a very interesting space to be in.
Though liquor is termed as staples, that is another space where we believe there are reasonable amounts of growth opportunities. Where we would be a little cautious is travel and tourism because I think that space has played out phenomenally well over the last couple of years at least post covid, their valuations are a little stretched, but again with a longer-term view we believe that travel, tourism, hotels, etc, would be very interesting. We would want to wait for the right valuations to go ahead and build a position out there.
What about chemicals because you did highlight that is one of the sectors which is looking attractive to you. But this is a global linked sector and there is a lot of uncertainty building in from the capital goods companies to auto, global OEMs, who are taking back their guidance. What is making you bullish on the chemical plays? Within that, will you go for specialty chemicals or base chemical companies? Where do you see opportunity?
Aniruddha Naha: So, we are getting reasonably positive on chemicals and more so on agrochemicals. Both these sectors have gone through a reasonable down cycle over the last two to three years. In fact, agrochemicals have gone through a longer down cycle. The good thing about this sector is that a large part of the capex is over and numbers are already reflecting the depreciation hit, etc, interest cost hits, etc.
Now, the reason why we believe this could be a turnaround sector is the inventory channel checks clearly show that the inventory levels have started coming back to normalcy. If that is the case, even if a large amount of pricing power doesn't come back, there would be some stability and downside protection in terms of where the pricing would entail and hence margins can start becoming more predictive in nature. But to align with your thoughts, the only thing we would be wary about is China's policy and if they continue to dump at below manufacturing costs, which we think has slowed down and where even to that extent, the dumping from Chinese have come off, but if that restarts, then chemicals could see some amount of pressure going ahead.But our belief is the worst is in place. Agrochemicals is a little more domestic oriented. The monsoons are predicted to be good. The last couple of monsoons have been good, the water tables are good. Earnings in rural India have started doing well. We believe that is a segment where at the bottom of a cycle, things can start coming back.
You mentioned that there could be some positive surprises as far as the earnings are concerned in the SMIDs. Up until now, we have been talking about the largecaps, but speaking of the SMIDs, even though the valuations are a bit stretched, there are pockets of value within that. What are these areas of pocket and earning surprises?
Aniruddha Naha: Let me clarify a little bit, the midcap segment continues to be a little expensive. There are no two ways about it. But once you go down the curve to the smallcaps and the microcaps, there are a lot of stocks where numbers are good. What is interesting is today the small and microcap segment has a balance sheet which is cleaner than the large and midcap in terms of debt to equity. So, the resilience is extremely high in the small and microcap side that is one and this has not happened in the last let us say 20 odd years from that perspective, the cleanliness of the balance sheet.
Then, when you come down to small and microcaps, it becomes very company specific but the capital good companies which have declared results in this quarter till now, have actually surprised a lot of people. Chemical companies in the small and microcap have surprised people and that is reflective in the kind of stock price movements that are happening in some of these names irrespective of where the overall markets are going. Our sense is it is a great time to be a bottom-up stock picking team, look for businesses where earning stability and some amount of pricing and operating leverage can lead to reasonable amounts of earnings growth coming through. It is very difficult to pick a sector, but at a stock specific level, there are a lot of places where money can be made.
Banking is another theme that you are tracking. Within banking, would you suggest taking eyes off the largecap names which have already delivered fantastic returns in the recent past? Maybe it is time to niggle into some of those small banking names?
Aniruddha Naha: We have largely stuck to probably the top three or four names because at least it lends visibility. There is fear of going down the market cap in financials as it happens to be one of the most leveraged businesses as for a Rs 100 equity or capital, they go ahead and borrow about Rs 600-700 of deposits. So, one needs to be extremely careful about going down the market cap. Having said that, there are some very interesting names among smallcaps, even among midcaps where one can nibble depending on the kind of appetite one would have in terms of volatility or risk appetite. Probably we can shift about 5-10% out of largecaps or even 20%, but even today from a stability perspective, we would stick to the larger names in the banking sector.