Positive on industrials, autos and building material, says Surjitt Singh Arora of PGIM India Mutual Fund

Domestic economy appears resilient in the wake of healthy macro-economic factors. Auto sales, credit growth and GST collections are all pointing towards a strong economic activity, asserts Surjitt Singh Arora, Portfolio Manager, PMS, PGIM India Mutual Fund, in an email interview with MintGenie.

He speaks about the popularity of small and mid-cap stocks, and shares his views about the sectors which are likely to do well in the near future.

He shares his view on India’s higher GDP growth amid global economic challenges. Besides, he advises investors to look past short-term factors to benefit from the long-term India growth story.

Small-cap category received substantial inflows in the month of June. How do you see this trend? Was that an aberration or does that speak of a larger trend?

The nominal GDP growth in India is pegged at ~11-12% for FY24E by various agencies, making the Indian economy one of the fastest growing in the world. To top it, the balance sheet of corporate India, especially mid and small-cap has improved meaningfully over the last few years.

In my view, this is a larger trend given the liquidity available with institutions like Mutual Funds and Insurance companies. Additionally, PMS and AIF products are getting higher allocation from HNIs which is mainly getting invested and parked in Small and Midcap companies.

What are the sectors that are likely to do well in the near and medium term?

We are positive on industrials, autos and building material sectors at this juncture.

Industrials: A major theme that may play out over a longer-term is the Production Linked Incentive Scheme (PLI) scheme announced by Government of India.

Currently, more than $32 billion has been allocated to various sectors under this scheme.

PLI scheme offers companies incentives on incremental sales from products manufactured in domestic units. It is aimed at boosting the manufacturing sector and to reduce imports.

For example, whether it's defence, bearings or capital goods, the companies are focusing on import substitution and ‘Make in India’ thought process.

Autos: On a 5-year basis, Nifty Auto delivered a 6.25 percent CAGR returns vs Nifty 50 return of 13.3 percent.

However, on a one-year basis, Nifty Auto delivered a return of 28.5 percent vs 14.3 percent for Nifty, as of June 30, 2023.

Building Material: The Real Estate (RE) sector accounts for ~10-11% of India’s GDP and is the second largest employment generator. Increased urbanisation, nuclearisation and aspirations are likely to maintain the sector’s significance in India’s growth story.

There are certain global uncertainties such as technical recession in Europe and slowdown in the US economy. Where do you see the Indian markets are placed amid these scenarios?

Yes, one has to be cognizant of the global slowdown being currently witnessed in both US as well as Europe. Fed has recently hinted at the end of the rate hike cycle, which at a margin, is supportive for equities.

At the same time, our domestic economy seems resilient given the healthy macros of the economy. Auto sales, credit growth and GST collections are all pointing towards a strong economic activity.

With global economies seeing growth slowdown in an inflationary environment and uncertain geo-political situation, India appears favourably placed due to its relatively higher GDP growth rate and moderating inflation outlook.

Higher proportion of working-age population, rising household income and stable government policy will act as structural growth drivers for the economy.

India stands out among its peers due to our focus on continuous asset creation, benign policy environment, prudent fiscal management and improved global perception. Corporate India by and large is expected to see strong earnings growth on the back of this structural demand outlook coupled with its strong balance-sheet.

What advice do you have for the young retail investors based on the current market scenario?

They should start early, be consistent with their investment and have patience. The long-term approach to investing is the key to success. They should start with investing in mutual funds with systematic investment plans (SIPs) and build portfolio over decades.

As benchmark indices are hitting all-time highs, what is your view on the valuation of stocks, particularly largecaps?

The Indian market has seen a broad rally in the past few months but headline indices have seen more modest performance. We are not very clear about the reasons for the rally and the divergent performance.

India’s continued weak consumption demand should be negative for smaller companies while the improved macro in the form of lower inflation and CAD should have been more favourable for performance of large and midcaps based on better top-down view of India among foreign investors. On a relative valuation framework, largecaps are better placed in the near-term.

In the medium-term, market focus would shift towards the general election scheduled in 2024. As we approach closer to the date, we could see increased market volatility due to speculation about the election outcome.

We are of the view that these are transient factors and would advise investors to look past these factors to benefit from the long-term India growth story. We continue with our positive stance on the Indian equity market from a medium to longer term perspective.