Manufacturing & BFSI are good investment opportunities, not MFIs: Manoj Bahety

Manoj Bahety, Founder & Fund Manager, Carnelian Asset Management & Advisor sees defence and railways as structural plays but feels one should be very cognizant of the valuations relative to growth and return on capital employed. In an interview to Amit Mudgill of BTMarkets, Bahety said MFI sector is prone to asset quality cycles and regulatory headwinds. Excerpts:-  

What’s driving the recent flurry of promoter and PE investor stake sales? Should retail investors be concerned?

While we are watchful of flurry of insider/PE sales, there can be multiple reasons for sale that may be beyond valuations. What is heartening to see that there is ample demand/liquidity which have comfortably absorbed the aforesaid supplies. Our advise to retail investors is to focus on core fundamentals and business metrics rather than paying too much emphasis on short term supply and demand of stocks.

Will IPOs and promoter stake sales pose a risk to the secondary market upside in the near term? Where do you see value in the current market?

We don’t think India is very expensive. India’s structural strengths: robust GDP “growth” (6.5–7 per cent expected in FY26–27), superior “capital efficiency” (leading ROEs) macro stability, strong corporate & banks balance sheets, moderate debt levels (83 per cent of GDP, mostly domestic), and benign current account deficit makes India a good investment opportunity over next 10-20 years. In terms of sectors, we think Banking & Financials, Manufacturing – Pharma, CDMO, Chemicals, Power, Auto/auto ancillaries will do well this year. With manufacturing capex coming onstream, margin improvement and operating leverage, corporate earnings to pick up substantially. 

Many defence and railway PSU names are back in vogue. Is the rally fundamentally driven, or is it largely a retail frenzy?

We like defence & railways as a structural story. However one should be very cognizant of the valuations relative to growth and return on capital employed. We clearly see euphoria in pockets where current valuations have run far ahead of fundamentals and we will stay away from such names. 

Microfinance institutions (MFIs) have shown initial signs of recovery. Do you think the sector could be re-rated in the coming months?

With credit growth picking up, we started seeing entire BFSI including MFIs to show the signs of recovery. However we don't consider MFI sector as a structural play. This sector is prone to asset quality cycles and regulatory headwinds.  We continue to like structural plays like Tier-1 Banks  with strong ROEs, growth and robust asset quality coupled with top notch leadership and risk management culture  and select NBFCs with strong liability franchisee with an attitude towards risk calibrated growth coupled with strong technology prowess.

What is your investing mantra? What advice are you giving to your clients these days?

Our investing mantra has been investing in quality growth companies managed by quality management teams at reasonable prices. Our philosophy has always been in identifying companies which offers accelerated earnings growth and valuation re-rating. We all know that when both comes together, you make a lot of money. In this turmoil we saw, lot of opportunities with valuation comfort. We have been buying banking  and manufacturing stocks in the fall. Our advice to the client is to  invest in structural growth opportunities (Quality business and quality management) with long term horizon and avoid short cut temptation to make fast money. India expects to deliver world leading growth during the Amritkaal period regaining its share in the global GDP from 3 per cent to 16 per cent and hence offers once in lifetime opportunity to create wealth for generations.

Equity benchmarks have recovered 12–13% from their April lows. What sort of enquiries are you receiving from your clients?

Our funds have been very resilient during market downturn (post September 2024) wherein our funds have fallen less than benchmark and during recovery phase our funds have outperformed the market. Investors have recognised the resilience of our portfolio construct and have started  fresh deployment or topping up their existing flows. 

What are the key risks to the market? What factors could trigger a rally in 2025?

Geopolitical risk is one the risk which can create short term volatility. With middle east conflict (Israel-Iran conflict), we are seeing sharp jump in crude prices which can hurt sentiment for a shorter term but structurally we don’t see any risks. Do not see any major disruption due to ongoing conflict economically. Most structural fault lines of the economy (CAD, fiscal, banking system, inflation and leverage) are well in control and best at any given time in history. With improving earnings visibility, a supportive policy environment, and macro stability, we expect earnings upgrade cycle, which can take “markets to new highs” in this fiscal.

What’s your view on a potential India–US trade deal? Do you think markets would respond positively to a phased agreement?

I think, it is very difficult to ignore India considering strong demographics, democracy, growth market and availability of talent pool and resources. India offers a unique combination of one of the most efficient jurisdiction coupled with one of the fastest growth market. We foresee very good probability of India-US trade deal and many more global trade deals materialising on favorable terms.