Indian economy entering a ‘Goldilocks period’, says Kenneth Andrade of Old Bridge MF; prefers infra, IT sectors

Kenneth Andrade of Old Bridge Mutual Fund in a recent report, described the Indian economy as entering a "Goldilocks period", characterised by ideal conditions for growth and profitability. However, it cautions that investors may need to align with growth businesses due to the scarcity of undervalued opportunities in the market.

The report also provided a cautious yet optimistic outlook on various sectors, emphasising the importance of aligning with growth businesses and being patient for opportunities to invest at attractive valuations. The infrastructure, IT, and select segments within chemicals and real estate are highlighted as areas of interest, with a focus on monitoring sector fundamentals and market conditions.

A Robust Economic Environment

The report painted a picture of a robust economic environment, emphasising that corporate capacity utilisation is nearing 90 percent, a strong indicator of healthy profitability growth for the current financial year. The conditions are described as favorable for both the economy and corporate profitability, suggesting a thriving business climate. Despite this positive outlook, high valuations present a challenge in finding undervalued investment opportunities.

Investors should align with growth businesses rather than seeking undervalued opportunities, which are scarce, it said.

Strategic Investment Approach

Old Bridge Mutual Fund advises investors to stick with their existing portfolio holdings due to the difficulty in identifying new undervalued sectors. The report advocates for patience, anticipating that opportunities to buy at more comfortable valuations will likely emerge within the next year or two. It emphasises the importance of monitoring troubled sectors for potential investments when valuations become attractive again.

Sector-Specific Insights

Infrastructure and Capex

The report underscores a strong private capex cycle, with various industries, including infrastructure, pharmaceuticals, chemicals, and automotive, actively investing in new capacities. Infrastructure, driven by significant government spending, shows substantial momentum, while pharmaceuticals and chemicals also exhibit robustness. It noted that the power sector, linked to infrastructure, is also experiencing substantial capex.

Within the infrastructure sector, the report pointed out that the entire value chain—from developers to commodity suppliers—is identified as highly profitable. Companies involved in government projects have shown improved performance and manageable working capital cycles. Contractors and commodity suppliers within this sector are highlighted as key areas with potential for further gains, it added.

IT Sector Revival

It further noted that the IT sector, despite recent underperformance, is seeing renewed interest due to its relative valuation comfort compared to other sectors. It pointed out that large IT companies have a robust pipeline of orders that could drive growth in the near future. The sector's revival is attributed to its valuation attractiveness and the potential for strong order execution in the coming years.

Chemicals and Agrochemicals

The report is cautious about the chemical sector, particularly agrochemicals, suggesting that it may take another year for the cycle to bottom out. It recommends a wait-and-watch approach, focusing on businesses with stable fundamentals, even if the broader sector remains challenging. Returns in this sector are expected to be moderated rather than the significant gains seen in previous cycles, predicted the report.

Real Estate

As per the report, the real estate sector is in the early stages of topping out. Companies are raising capital to buy new land banks, which could temper sales due to rising prices. While the sector has performed well, the report suggests that the best gains may be behind it, and the leverage cycle in some companies could begin in about a year.

The Old Bridge Mutual Fund report presents a cautiously optimistic outlook on various sectors of the economy. It emphasizes the importance of aligning with growth businesses and being patient for opportunities to invest at attractive valuations. Key areas of interest include infrastructure, IT, and select segments within chemicals and real estate. The focus remains on monitoring sector fundamentals and market conditions to identify potential investment opportunities as they arise.

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