IKIGAI Asset Manager highlights contra sectors to watch in 2025 – CNBC TV18
Cement is set to benefit from consolidation and restrained capacity additions, while metals may gain momentum as global fiscal policies align.
Specialty chemicals, recovering from a prolonged earnings slowdown, could see robust growth as destocking pressures ease. These sectors, along with select consumer plays, offer intriguing prospects for the year ahead, he added.
Read the verbatim transcript of the interview.
Q: So much is going on around us, right from geopolitics to tariff talk to major interest rate action we are awaiting the Fed next week and a change of guard at our own central bank. So given the extent of news, information and noise, what do you expect? More consolidation, but is a downside intact. I mean, have we made our lows, at least for now?
A: If you look at this correction has been a very healthy one, though we are down about 10 to 11% from the peak, but index actually masked the damage. Where we were looking at about 4,600 stock universe, and about 75% of that is down by more than 20% plus and even we have seen cuts of 30% ,40%, 50% and many of those stocks have not still come back even markets have recovered a bit. So I think over the next 12 to 18 months, we should look at range bound markets, maybe 22,500-23,000 on the downside, because earnings would provide some support, and probably 25,000-25,500 on the upside.
Within this band, I think stock picking will be rewarded. What we are seeing is that the breadth of the market is getting narrower and narrower. The style shift has started to happen. Last three-four years was all about momentum, data value. For the last six months, what we are seeing post-election is quality is making a comeback. We are seeing growth being rewarded again. We are seeking low volatility outperforming so I think style regime change has also started to happen.
Also, don’t forget, from a macro perspective, first half, we have seen a severe slowdown in the economy and led by various factors which have been spoken about, like government expenditure being slow and don’t forget, this year, in the first seven months, government met just 42% of the target. This has been the lowest since 2010 and hence we saw severe slowdown at the ground level. Going into the second half, our sense and the feedback from the ecosystem is that the things have started to improve, and probably government expenditure from the last quarter should actually pull up. The economic parameters and high frequency indicators have started to suggest that.
However, my only worry is that the expectation of the street for FY26 earnings growth is still on the higher side, at about 15 to 16% and I think in the next two quarters, still street will readjust its earnings forecast for next year. In our sense, it will be about 10 to 11% earnings growth, and hence market returns will more be a function of earnings growth.
Last four years, we compounded at 20-21% and markets clearly reflected that momentum in earnings. If earnings growth is slowing down, probably we should also moderate our return expectation. Hence, we believe that last three, four years have been extremely charitable. There was no differentiation between luck and skill, and I think now it will be men versus boys as you move ahead into the next 12 to 18 months.
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Q: Now let us get to the actionable ideas for 2025. In an earlier conversation, you had spoken about being positive on insurance, but now increasingly, what CNBC-TV18 has learned from sources is that IRDAI has flat concerns about this over dependence of insurance companies on their bancassurance platforms, and the stocks have been under. Are you still bullish in insurance? If the IRDAI takes some measures to address this concern, will it hurt insurance, does it change the thesis?
A: No, it doesn’t change the thesis. The runway for growth, from an insurance perspective, is very long, both on general as well as life. These disruptions will keep on happening from a regulatory angle. But all these companies are very, very strong, and the growth opportunity is very large. If we get opportunities at lower levels. This is one sector where we should be positive on in the BFSI segment. And also the financialisation of savings, we have seen how exchanges, depositories, have behaved over the last 1, 1.5-2 years. They have given phenomenal returns, and we believe that in the BFSI space now, there are enough options, rather than only depending on banks, whether private or public.
You have insurance, you have capital market place, you have NBFCs and hence, I think that the weightage of BFSI in any portfolio compared to five six years back, is not only dependent on banking, but the entire lot. We continue to remain positive on banking and financials and within that insurance capital marketplace are our preferred bets.
Also from a 2025 perspective, couple of sectors which are looking probably interesting and maybe contra at this point of time, one I believe, is cement. I think the worst in cement is behind us. The benefits of consolidation has not been seen and at this level of profitability, it’s suicidal to put incremental capacities, because you are earning 5-6% return on capital. Entrepreneurs are better off parking that money in fixed deposit rather than going for expansion. Hence, our belief is that profitability has to improve to justify new capital expenditure in cement sector, and that is one area over the next 24 months which can show momentum as you move ahead.
The second is metals. It is a complete contra thought, but we believe that the contribution of metal sector to the overall profitability pool in the country is back to 2001-2002 levels, and that is an interesting space to be in. As two of the largest economies in the world will have a fiscal lose policy, US on one side, and incrementally, China on the other side. Our belief is that the sector is underowned, and probably incrementally, you could see momentum getting developed on commodities and metals as a sector.
The third is specialty chemicals. For the last two, two and a half years, we have seen the sector seeing downgrade in earning cycle, led by slow down destocking. I think we are coming towards an end, probably in the third or the fourth quarter, and our sense meeting so many companies and the entire ecosystem, is that the worst is behind in chemicals. Probably in the next two years, the earnings CAGR in this sector is likely to be higher than the earnings CAGR we have seen in the past two years. So I think this sector could also find favour among investors as you move ahead, once investors start seeing growth in across the companies in the sector. So these three could be the contra bets as we speak.
Otherwise, consumption has started to look interesting. It’s a K-shape recovery. It’s a mixed picture. But I think valuations have started factoring in a lot of pessimism, and in certain cases, we believe on the consumer discretionary side, there is some interesting bets emerging. Even on the stable side after the correction, what we have seen we were looking at our numbers and on FY27 basis, many companies have started to look a bit attractive assuming a normalised consumption scenario over the next 24 months. So this is how we should be positioned, moving into 25 in terms of our sectoral preferences at the margin.
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Q: On consumption, elaborate a little more. It’s a very confusing picture, and I want to understand when you are saying that, yes, obviously stocks have cooled off these large FMCG companies, but then how much are you willing to pay, and what is the kind of growth you’re pencilling in? There is a debate saying whether for 5-6% kind of volume growth, you should be paying top dollar, but you are saying valuations have become comfortable. Just give us some numbers, growth and the PE that you are okay with.
A: Let us look at consumption into three buckets and I believe that we will make a mistake if we look at consumption as an aggregate part. There is India-1 which is the top 10% of India, where the aggregate per capita is about $10,000 to $12,000 and globally, if you look at once, you cross that $10,000 mark your expenditure on grocery necessities flatten out and you don’t spend more on that. You spend more on experiences, and other discretionary. That top 10% is driving the Indian consumption.
The next 30% where the per capita is between $3,500-$4,000 is the aspirational India. If you provide them with right quality products, right pricing, they are there to lap it up. Many companies, for example, Zudio Trent, some of the other names have addressed that part in the tier two, tier three, tier four cities, and they are seeing phenomenal growth. The rest 60% is between $1,000 and $1,500 per capita, they are struggling because of inflation, because of EMI, because of many other things. The stress is visible if you look at the data of MFIs or FMCG players, which are catering to the basic needs.
Our sense is that if you focus on the top 10 and the next 30% of India, which is India-1 and India-2, and companies which are doing brilliantly out there are those companies which are catering to those two sectors. Our preferences and consumption that don’t paint the entire sector with the same brush, have stock which could cater to India-1 and India-2 and I think your portfolio should do well. On the other side, when I look after the correction now, lot of companies probably have come to about between 35-40 times earnings in FY26 or FY27, some of the FMCG names as well, and we are pricing and pencilling in the worst of consumption basket right now.
However, if you look at the ground level, the rural has started to pick up. The commentary across rural, whether it be two-wheelers, whether it be tractors, have been positive. Many of the FMCG players also have started talking about rural being positive. So I think if you move into FY26 and FY27 I think consumption basket as a whole should start showing momentum. We are seeing the worst pricing and overall, my sense is that this sector is no longer uniform, you have to pick the right companies, the right sector, which are catering to the right audience, and hence you will not be disappointed.
Our sense is that we are very stock-specific in this sector. But this is an interesting opportunity where many consumer names are coming between 35 to 45 times. When I look at the other sectors relatively speaking, which are B2B, they are trading at that valuation on an FY26-27 basis. So I think some incremental positions could start to build upon and don’t forget, good prices, and good news don’t come together. So quality companies during bad times have to be looked into and some of the value-retaining guys are looking good. Some of the consumer discretionary names are looking good, and maybe after the correction, some of the FMCG names will also start to look good. So that will be out approach towards consumption.
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