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    Speciality chemicals to be the next great export pillar for India: Varun Goel

    Synopsis

    Various studies show chemicals will be a $100 billion industry in 6-7 years, said Head of Equity, Nippon India AIF.

    Varun Goel_Nippon
    I think the biggest attraction for consumer companies at this point of time is the fact that there is no debt.
    I was going through your portfolio and I saw a lot of consumer names in your portfolio. We will not talk about names in particular but what are your thoughts when you look at some of the consumer stocks? Do you think the aggregate demand amongst consumers on the Street will be badly hit? How bad could it get in your view because of the Covid impact?
    There is no denying the fact that the consumer demand in the short term is definitely going to be impacted. As far as the situation in the last one month is concerned, we have seen a significant impact on the demand especially on the discretionary side. As far as staples are concerned, maybe because people have been hoarding and now there is a lot of demand for food items and personal wash products, we are seeing a lot of sales there.

    But generally, this quarter is going to be extremely muted. Hopefully, if the coronavirus curve stabilises like we have been seeing some news flow for the last four to five days in the western part of the world, be it the UK and the US; if the situation continues to be that way in India, too, we should hope that the impact will be limited to this quarter and the second half onwards, we should start seeing a significant revival as far as consumer demand is concerned in line with what is happening in China.

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    I think the biggest attraction for consumer companies at this point of time is the fact that there is no debt. Please keep in mind that any company which is under leverage now will see significant issues in terms of liquidity and we are going to face challenges going forward. So those companies which have cash rich balance sheets, have good clean corporate governance will continue to pay and as and when demand comes back, we will see these companies coming back very strongly.

    The other thing which is coming up in our conversations with corporates and a lot of funds is that speciality chemical and chemicals is an area where India will see a lot of opportunity because of manufacturing moving out of China. I see some of those similar themes in your AIF portfolio as well. How great could this opportunity be on the specialty chemical front? It would be a multiyear because chemicals as a percentage of overall market cap in India is way lower compared to the global average?
    If you see today, chemicals is a $36 billion industry already and various studies show that in the next six to seven years, this can become a $100 billion opportunity. The biggest learning for the world in this coronavirus crisis is that it is not a good idea to concentrate all manufacturing in one country or one manufacturing location. We see a lot of business coming to India. It was already anyway coming in the last few years because of trade war issues. Our per capita cost in terms of labour is also lower than China; so business was anyway shifting and this will again accelerate going forward.

    So agrochemicals and APIs, pharma and a lot of consumer durables use a lot of chemicals. All these industries continue to show very good growth and as a result, we believe some of the speciality chemical companies should have a fairly long runway. Just to put things in perspective, despite a 30-year run now, IT today is a $100-110 billion export industry out of India. We missed the bus on semiconductors, we have missed the bus on electric vehicles but speciality chemicals would be that industry which should be the next great export pillar after the IT industry as far as India is concerned.

    What are your thoughts on financials that are on the receiving end of the market and understandably so; if the economy slows down, leverage will not be created and people will run away from any kind of debt unless it is extremely important. What are your thoughts on small finance banks as a category and some smaller private banks in the overall space of financials because I see some representation in your AIF?
    There is no denying that as far as the financial industry is concerned, the next few quarters are going to be extremely challenging. With this current situation, people are going to find it very difficult to pay their installments and EMIs and term loans for the next one to two quarters. Those financial institutions and banks which have done unsecured lending are going to be impacted.

    For all others also, we are going to see some pressure in margins because we have to keep surplus liquidity. There would be an increase in NPAs. It is quite likely that all of them will see an increase in NPAs for this year. The growth will have to come down considering that environment is very challenging. The important thing to see is whether this slowdown is temporary or more longer term in nature. For some of these well-managed NBFCs and banks and even the small financial banks which have done good underwriting, which know their borrowers quite well, have good solid collateral against the loans that they have given out should see this as a more of one or two quarter problem.

    For those institutions which have done very aggressive lending in the last few years, we have seen things have really become very difficult in the last month or so and we could see more trouble going ahead. But it is very important that one goes with cautious careful management at this point of time and the industry as a whole might see a difficulty here in FY21.

    How is your interaction with the HNI clients happening right now? Is there a view that they would like to stay invested? They want to remain liquid or do you think there is one section which is keen to buy even at current levels and investors are maturing now?
    In various interactions that we had with our investors and distributors, one thing is very clear that this is a very news flow-based event in the sense that we do not know how the coronavirus problems will play out and how soon it can end. If it ends the way it has happened in China, things can come back to normal in a matter of one quarter. If it extends beyond that, things could be more difficult in the sense that the slowdown could be a little longer.

    So a lot of our clients and distributors are also taking a call that one needs to be cautious. So the best thing that we are seeing is that while we continue to see inflows, although the quantum has been reduced, they are staggering out the investments. What people are doing is looking to put 25-30-35% of their money to work right now considering the fact that we have seen a very-very significant correction of around 35% to 40%. We are seeing investors looking to build the portfolio in the next 9 to 12 months which we believe is the most prudent approach considering the fact that a lot of these uncertainties in the market will soon get addressed over the period of next six to nine months.

    With valuations being so attractive, these are great time to build the equity market portfolio for the next three to five years and that is what our investors are doing, which is to gradually put money to work; not go all in at this point of time but stagger out the investments over the next 9 to 12 months.



    ( Originally published on Apr 07, 2020 )
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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