“Companies in the auto sector, capital goods space, chemicals and selectively pharma are seeing some very strong demand outlook as far as this theme is concerned. A lot of these companies and a lot of these sectors are also putting up capacity in the PLI scheme. That is where we place our bets and that is where we feel very comfortable in terms of growth outlook for the next three-four years,” says Pawan Parakh, Portfolio Manager, Renaissance Investment
In terms of leisure travel, we spoke to a lot of hotel and travel companies. They are saying spending is going up because it has really not gone up for a while. Could that be an interesting consumption space?
Absolutely. We are seeing some very serious demand tailwinds in the entire travel and tourism hotel sector and this is coming at a time when business travel is still not at pre Covid levels. As I speak to some of these leading companies, what I understand is that business travel is just about 85% to their pre Covid levels.
Over the next three, four months, that will rebound to 100% level. The most important thing out here is to understand that in the last 10 years’ demand growth has kept at par with supply but over the last three years, supply has seen some serious constraints, while demand has rebounded quite well.
The tilt is now in favour of demand and it is a dream situation that this sector will enjoy for the next one or two years and hence earnings, cash flows, ROEs on all parameters all the companies that operate in this sector will surprise on the positive side over the next one or two years. The only caveat dealing with Covid is that it is going to be an absolutely non-event kind of a thing as far as India is concerned. But it is always uncertain to comment about Covid. Apart from Covid, there are some serious tailwinds for the sector.
As far as the heavy capex space is concerned, what do you like over there because I am sure you would have seen the 2008 issues for a lot of these heavy capex, power, infra companies. Which sectors have come out of it? Where there is still no aggressive bidding and which sectors are you seeing execution in?
One can divide capex into two parts. One is bid-based projects, wherein typical infra companies bid for a government project and executes it under the BOT and the other sector is the private sector capex. Typically companies in the chemical and auto spaces are expanding their capacities not only to serve the domestic demand but also to benefit from China plus one theme which is going on globally.
We are more positive on the latter because there we see some serious demand benefits and tailwinds that these companies are enjoying. Take the case of the chemical sector. In several commodities, India is a net importer of chemicals. Apart from that, the customers in the western world are asking these companies to put up capacities because one thing which is very clear is that the entire world wants to now diversify their supply sourcing along with China.
While China will continue to be the largest supplier for the next 5-10 years, there is clearly a trend wherein they want to diversify their base. Companies in the auto sector, capital goods space, chemicals and selectively pharma are seeing some very strong demand outlook as far as this theme is concerned. A lot of these companies and a lot of these sectors are also putting up capacity in the PLI scheme. That is where we place our bets and that is where we feel very comfortable in terms of growth outlook for the next three-four years.
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