Corrections almost over in largecaps but not in mid and smallcaps; 3 sectors to avoid now: Nitin Raheja

Nitin Raheja, Head-Discretionary Equities, Julius Baer Wealth Advisors, says the correction in large-cap stocks, particularly the Nifty 50, is largely complete, with limited downside expected around the 22,000 level. Mid and small-cap valuations still need adjustment, making it a bottom-up market driven by results. Infrastructure and cement sectors offer long-term value, while EMS shows growth potential, but increased competition may pressure margins.

Raheja further says any sector where new players are entering and yet the multiples are elevated are the sectors he would avoid. He says paints, wires and cables and quick commerce are three such segments.

How do you look at this market? How should one play the market now? See, the entire tariff news has been played out. We have already digested the pain coming in from tariffs. The earnings downgrade is already priced in. We have corrected a fair bit and there is limited downside risk now. How should one look at the markets? How should one navigate through it?
Nitin Raheja: You rightly ascribe to the fact that a lot of the bad news –whether it is with respect to the tariffs and the uncertainties of the tariff, plus the earnings downgrade and the cyclical slowdown that we are seeing – have been discounted to a large extent. However, what we have not discounted is really what could be the second order impact if because of this flip-flop on tariffs, the US economy were to slow down.

Do not forget that while we all looked at the first order impact of tariffs on individual industries, a slowdown in the US economy or if it potentially gets into a short recession, that will have an impact on the IT sector, which is hugely dependent on the US economy and employment trends and commensurately consumption, which already is facing challenges. So, that is an uncertainty which is still hanging out there. Our own belief is that a large part of the correction in the largecap space, especially if you look at the headline Nifty 50, has played itself out.


We believe that around the 22,000 level there is very limited downside from there for the Nifty and so, in the short term, we believe it will trade in this range, it will keep seeing rallies and then cool downs and so on and so forth. But in the mid and smallcap space we believe there is a valuation pain that has to be seen completely. But having said that also we are not seeing any clear themes or trends in the short term play itself out. I believe this is going to be a bottom-up market, and it is going to be determined by the result season in terms of what stocks and which companies will be the winners.

If someone has to take a longer-term view of over a year, which pockets are looking interesting to you right now? You highlighted that financials are one of the safest bets in this particular market, but other than that, does any pocket give valuation comfort?
Nitin Raheja: So, besides financials, you probably will see some amount of valuation comfort play out in the so-called infrastructure construction stocks which have corrected quite dramatically in this correction that we have seen over the last few months where valuations have become attractive. We see some part of that also in sectors such as cement, which are all local building material-oriented sectors. However, there, also you have to be very wary.

One of the big trends that we have seen in the recent past is the increase in competitive intensity across sectors, which means that margins are going to be under pressure for a lot of these companies, especially in areas such as building materials and so on and so forth and that could mean that any scope for disappointment could be sold down. But cement is a space within that which offers some degree of comfort. I think the EMS space has corrected quite a bit and there is something which we could see continued growth happening over the next few years.

While India is a big beneficiary for EMS space, with the government push, India is on its way to become a big major EMS manufacturing hub. But having said that, there was also news on tariffs as far as the EMS space is concerned. Would you be concerned about that?
Nitin Raheja: A large part of what we see in most of the EMS manufacturers is a domestic orientation and on top of that, when we talk about tariffs, we have got to a stage where high tariff numbers were set out and then rolled back. So, what will probably follow over the next few months is some bilateral trade deals or tariffs at far lower levels than that happened. In that sense, the worst fears of tariffs have already been built out there and what comes, will probably surprise. So, EMS will continue to do well.

In the EMS space, do you get that valuation comfort now or do you believe that the opportunity size is big and one should start looking at it and that valuation could take a bit of a backseat? Also, is the China plus one story too big to play for the Indian players as well?
Nitin Raheja: Within EMS, you have to be very selective and there are players who have seen a fair degree of correction which when you look at them in relation to the kind of growth numbers that they are talking about happening, have started to look attractive. It is not a broad space. What is pretty interesting is, at the present moment, there is no broad sector space. You could say this sector looks interesting and look at all companies. Within each sector, there are companies that will need to be looked at, which have business plans, which are more domestically oriented.

But having said, to answer your China plus question, clearly the developments of the past few months have only strengthened India's case for the China plus one story to happen because India is being seen as a non-threatening, more on-the-table negotiating player and that gels well with the kind of approach that we are seeing from the West. The whole manufacturing China plus story presents a great opportunity in this scenario for India to put its hat into.

Domestic consumption, domestic theme, domestic facing companies is a common consensus now. I can see that you are bullish on domestic consumption as well. Within the consumption basket, what are the pockets of value or what are you bullish on? Is it the airlines or the hotel space? Do you like the discretionary end of consumption? What is your bullish theme?
Nitin Raheja: Within the consumption basket, we are looking at A) the premium side. While we have seen a great deal of growth happening in premiumisation, there is some element of pricing barriers that are starting to come up as far as demand is concerned and hence, some of the stocks in that sector have seen a correction.

But clearly the whole experiences-based economy has been plugged into by airlines. What has happened in the airline space is that the sheer capital deployment that is required and the lack of appetite for risk capital to be deployed on the part of Indian corporates has meant that there has been a consolidation and that has given huge pricing power. So, I do not see anybody coming in a hurry more with the problems of Boeing and also in terms of delivery.

So, airlines will continue to show great resilience through this. The hotel industry will continue to show good growth. What I see in the hotel industry is a lot of growth being driven by supply rather than pricing because pricing is starting to see some sort of barrier, so that is one element. Organised retail in terms of malls are doing well because there are very few pan-India malls that are there and there has been a consolidation out there. So, retail will come back.

There are two or three factors that I see where the bottom K of the retail domestic piece, which has been lagging so far, should come back. One is the tax cuts on the part of the government in the Budget. The second is the revival in the rural economy. The third element will be the pay commission recommendations where we will see an increase in salaries for government employees over the next one year. As we get into the next festival season, there will be a bounce back of the bottom K of rural India and that is the other part of the pie that looks interesting.

You have been constructive on the markets and highlighted some of the sectors that one can start looking at or where you have the comfort level. Amidst this sector churning, which pockets will not participate in the rally or the recovery that is expected?
Nitin Raheja: One of the key elements that we are seeing is that competitive intensity in a number of sectors is going up. In paints, we saw competitive intensity going up and multiple deratings happen. We have seen the entry of two very large players into the wire and cables segment and competitive intensity going up. There is heavy competition in the quick commerce space. Any sector where new players are entering and yet the multiples are elevated are the sectors I would avoid. I have given you an example of three such sectors.

Financials is something that you are bullish on. Within the financial basket, do you see a lot of valuation in the PSU pack because it has been leading the rally from the front? Also, PSU banks are big beneficiaries of rate cuts. Within the financials, where do you see value – the PSU pack, private banks, or NBFCs?
Nitin Raheja: The first phase of the rally in my view is going to be driven by NBFCs because when you see an interest rate cut, the obvious beneficiaries are the NBFCs who are borrowing from the banks. So, you first see the cut in the lending rates, followed by deposit rates. We have already seen a couple of large banks proactively take a stance and reduce deposit rates. We have seen the largest public sector as well as the private sector bank doing it so far.

So, the first beneficiary is going to be NBFCs in the next six months and then as the impact of these rate cuts starts percolating down to deposits, we are going to see the whole banking or the private banking space as well as some of the top PSU banks participate in it.