Consumption and infrastructure 2 top compounding themes in market now: Sumit Bhatnagar

Sumit Bhatnagar, Fund Manager, LIC MF, says consumption is expected to rise and can be a top compounding theme as factors that slowed it down recede. Rural consumption has revived and urban consumption should follow. Tax cuts and RBI measures on unsecured loans will help. Government pay commissions in FY27 and FY28 will inject funds. The second compounding theme is infrastructure. India needs infrastructure investment in power, ports, railways, and roads. Focus on infrastructure is expected to continue.

After that RBI bazooka of repo and CRR cuts, the Indian markets were seen to be trending higher, but given the fact that the crude oil is now showing a surge in the international market, what do you make of the market and where are we headed from here?
Sumit Bhatnagar: We are positive on the markets over the near term. We are seeing a very clear sign of economic revival as also a potential for corporate earning revival as well. If you look at the global environment that we are in, both the IMF and World Bank have cut their global growth estimate by 50 bps. In that kind of an environment if your economy is growing at 6.5%, it is still a pretty decent number.

With the recent policy measure that you just mentioned by the RBI both on the monetary side as also the regulatory step that they had taken earlier, it provides a significant support to your economic growth outlook. If the credit growth revives and if the credit growth picks up, then there can be a small positive surprise on the RBI GDP growth estimates as well.

In that kind of an environment, markets should do well from here onwards also, but that should broadly be in line with the corporate earnings expectations which we expect to be in a low double digit return, low double digit over next one or two years. In so far as crude is concerned, even at $70 crude is not a major concern for us as it is within the budgeted numbers, its impact on inflation can easily be managed.

What are some of the top secular or compounding themes in the market right now? What are you liking among the sectors at the moment?
Sumit Bhatnagar: The top compounding themes to my mind would be consumption now. What has happened is that over the last two years consumption has lagged, but now the factors that were impacting the consumption or leading to slowdown are slowly receding. While we all know that rural consumption has revived, urban consumption also should now revive over the next one or two years.

One is led by the tax cuts that the government has announced. Secondly, the steps that RBI has announced in so far as your unsecured loans are concerned should also help in revival of urban consumption. More importantly, in FY27, we expect central government's pay commission to come in and at the same time, one year later, maybe in FY28, some state government pay commission should come in and that should push in around Rs 2.5 lakh crore into the hands of one-and-a-half crore employees and that should provide some bit of a support to consumption.

The second compounding theme is infrastructure. We think India still is very underinvested in so far as infrastructure is concerned, including power, power transmission, ports, railways, and roads. If you are planning to be a major manufacturing hub, you want to be a China plus one type of an alternative, there is no choice but to invest heavily into infrastructure. Both the central and state government's focus continues to be on that. Last year may have been an aberration. We expect focus to continue going forward. So, these two would be the key themes for me.

Help us with your take on the IT pack as well. The sector has not participated much in the recent rally that we have seen, but for the past couple of days, select IT counters were buzzing. Is there merit to once again look into any of the IT counters? Can they do well?
Sumit Bhatnagar: IT as a pack is in a very tricky situation. While valuations have corrected somewhat over last six months led by global uncertainty, if we do not see a revival in global growth, if uncertainty around us does not recede or US-China does not recede, we can continue to see disappointments in it, so that is one space where there is a potential of a downgrade if the global uncertainty does not recede per se.

And if you talk about the overall market construct right now, Q4 FY25 earnings have been better than what the Street was estimating. On the back of this, do you believe there are any sectors that need to be relooked or revisited in terms of any rerating, derating perhaps?
Sumit Bhatnagar: Broadly we expect low double digit type of earnings at a largecap level over next two years. But in terms of sectors, maybe financial, both banks and NBFCs can now surprise positively. The recent RBI measure can help banks in managing the NIMs much better with a CRR cut that they have announced.

Plus, frontloading of the repo rate cut should help NBFCs as well. With credit growth revival, there can be earnings surprises in both these segments. Secondly, telecoms with the possibility of a tariff hike can surprise positively on earnings. Cement, we expect to do well with the prices holding up firmly and with the volume growth of 6-7%, cement can surprise on upside in so far as earnings are concerned. Consumption over the next two-three years can surprise if demand picks up. Drivers are now getting in place for demand revival, but we need to watch out for that.

What is your take on metals? We believe the government is likely to hike the safeguard duty on the steel products beyond 12% and on a month-on-month basis, we are seeing domestic steel production inching higher. What will impact the steel stocks? Will it be the demand, will it be the price, or will it be supply?
Sumit Bhatnagar: Our sense is that in the entire metal space, steel is one segment that should do reasonably well. Even without your government support on anti-dumping or safeguard duties, steel volumes were still growing at a pretty healthy 8-9%. And with the government's plan to hike duty to 24%, it could only reduce the cheap Chinese imports that are coming in. So, maintain a positive view on steel, but valuations also need to be looked at in steel stocks.

What is your take on emerging sectors like aviation as a subsector of defence? We have already seen a significant runup in some of these defence counters. Would you still continue to be bullish on defence and also aviation in terms of drones as a subsector of defence?
Sumit Bhatnagar: So far as defence is concerned, till about a month back, it used to be a narrative sector, but after the proof given in Operation Sindoor, the narrative part is over, now they can actually offer a very attractive opportunity over a medium to long term. With the kind of proof that we have seen, we do expect some bit of an inquiries or increase in inquiries for your defence platforms as well.

Earlier, we used to export support consumables, but now platforms also are a fair game but that is going to take time. So, in so far as near-term is concerned, the recent rally prices in a lot of positives and space as a whole may be a fairly priced or maybe inching towards valuations as well.

In so far as drones are concerned, we have seen the importance of drones in Operation Sindoor per se and even in Russia-Ukraine war. Now drones are a very effective weapon system as well. Drones have both a defence as also your industrial application. As a space, drones can do well, but unfortunately there are not many options available to play this space.