Portfolio Talk BUSINESS INDIA r JulyI2-25,20L0

'Domesticconsumptionwill takeoff'
Prashant Patel, a stock market investor and founder of Equest,a
z
Mumbai-based proprietary investment boutique, specialisesin deep
value strategiesand themes; he has been involved in researchand fund
management activity for the past decadeand a'half and has interacted F

with managements of over a L00 companies. Patel spoke to Roy Pinto

on the prospectsof the Indian market and investment avenues

Everyoneseemsto feel that the mar-
ket could go down from current levels
in the short term. What's your view?
FY10 has seenthe market almost dou-
bling and that too, quickly. Indices
have been moving sideways, though
stock-specific activities have been
picking up. The rise has been basedon
re-rating of valuations from the low
base achieved in FY09, whereas earn-
ings growth has been almost zero in
FY10. The market climate currently
seemsto be an interplay of domestic
tailwinds and global headwinds.
In the past few quarters, domestic
macro-economic indicators and cor-
porate earnings have-recovered from
low bases and are looking healthy.
Domestic consumption trends, led by
automobile sales,have been encour-
aging month after month. Structural
drivers, along with trickling reforms
and normal monsoon, have the
potential to increaseearning expecta-
tions in Indian equities. Meanwhile,
enough evidence is getting accumu-
lated in global markets of rising risk of
a second leg of correction in the
global economy and markets.
But the question is, is there a bal-
ance between risk aversion and the
risk of missing an opportunity?
Investors seem to be torn between
'the risk of missing an opportunity'
on the back of structural tailwinds in
the Indian economy and 'the risk of
losing money' on the back of struc-
tural headwinds in the global econ-
omy. Recent outperformance of the
Indian equity market seems to indi-
cate rising risk tolerance. On the other
hand,, risk aversion has not receded
and there are enough investors con-
cerned about global risk. There is a
good balance in terms of investor
behaviour and there seemsto be good
diversitv of views. Markets become
dangerous when such diversity breaks
down. Continued outperfolmance
could evaporate the remaining risk
aversion and take the market up by 5-
10 per cent. But from there ofl,
chancesof deepercorrection rise.
The longer term India growth story is
intact. What are yourviews?
There are enough factors to support
strong long-term structural economic
growth. Domestic consumption will
take off in the coming few years, on looks promising on the back of open-
the back of a rising working popula- ing up of huge generic markets. Spe-
tion and per capita income. Just like cific opportunities are likely to arise
the US consumption growth in 1980s from infrastructure investment
and China in 1990s,India's consump- amounting to Rs3-4lakh crore.
tion market could explode soon. More
than $50 billion is likely to be spent Which companies would you
every year on core infrastructure recommend for investment?
building. This will have a multiplier Despite reducing the margin of safety,
effect on growth. Several structural there are a few companies that look
reforms will prove vital. Reforms in attractive. Godrej Industries is a good
the rural economy can add to long- long-term investment. Its current
term prospects. Inflation and slower market cap of roughly Rs5,400crore is
global capital flows could act as lessthan its holding value in Godrej
dampeners, but the broad socio-eco- Consumer and Godrej Properties.
nomic-political equation looks Ero Parry, the flagship firm of the
promising; but does not necessarily Murugappa group, is.another decent
mean higher equity returns. long-term investment. An integrated
sugar player, it owns 63 per cent in
Which are the industries/sectorsthat Coromandel International and has a
investorsshould watch out for? 51 per cent;v with Cargill for a sugar
Investors can focus on domestic plays refinery. The current price of Rs410is
and avoid global plays in general. about 2O per cent less than the hold-
Domestic consumption is likely to see ing value of Coromandel Interna-
good traction, as we add another tril- tional, and all other businessesare
lion dollars to our cpp in the next few available for free.
years. Several mid-sized cities are One small-cap stock worth investing
growing rapidly, which may result in in is Automobile Corporation of Goa.
healthy prospectsfor consumer prod- At a current market price of Rs230,the
ucts - automobile, durable products stock offers value. With an RoCE of an
and fast-moving consumables. With average3O per cent-plus for the past
rising urbanisation and aspiration lev- one decade, earnings yield of over
els, leisure too should do well. Con- 1.2per cent and cAGR (sales)of 20 per
sumer finance and media will also be cent in the past five years, the stock
beneficiaries. The pharma sector looks juicy. .

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