Profit growth: Pawan Parakh on 3 sectors that will see a surge in profits

What sector do you think would see the biggest earnings growth from now on, because any PE expansion that would need to happen in the market may have already happened. Now, the stock’s performance will depend on whether earnings can catch up. What are some of the areas where you think earnings could grow quickly?
Pawan Parakh: We just covered a couple of sectors, pharma is one of them because if you look at a lot of these pharma companies, they all have a couple of blockbuster molecules in the pipeline that will lead to very large revenue growth for all of these names, not just in this first quarter, but at least over the next year or two.

So, pharma is one of the sectors that is at the top of my mind. In manufacturing, if you look at some of these sectors like renewables and some of these sub-sectors like automation, these are companies that will benefit not only from revenue growth but also from significant margin improvement because of the operating leverage that they are seeing.

It’s not specific to Q1, but looking ahead, one year and two years, telecom is one of the sectors that will see multiple tariff hikes, so it’s one of the sectors that will see very rapid earnings growth again. While many of these sectors have seen rapid earnings growth, it has also coincided with a decent amount of cash flow generation.

What about telecom? Which end would you like to see as a revival of the game, an established company, or as part of another larger giant?
Pawan Parakh: Mr. Sunil Mittal of Airtel has repeatedly emphasized over the years that the industry needs at least Rs 300 crore ARPU. The latest reported ARPU is closer to Rs 210 crore. So, we still have a growth of Rs 90 crore, which is a good growth of less than 50%, which we can see in the next year or two.

If the entire telecom industry is going to benefit from such a rapid increase in ARPU, it makes more sense to focus on telecom. Secondly, the companies that are going to benefit are going to be the primary beneficiaries of this ARPU. Some of the companies in this sector are either exposed to international telecom companies or non-telcos, or maybe non-retail companies, let’s say corporates and others, or maybe they are part of a large umbrella. So it makes more sense to focus on India.

One more thing that needs to be highlighted here is that even though we are talking about 5G, a good 20% or more of the Indian telecom user base is still on 2G. As the 2G user base migrates to 4G, 5G, there will be an organic increase in ARPU, which will benefit many of these telecom companies. I would rather bet on a dedicated play in India and the companies that will benefit from this shift from 2G to 5G or 4G.

How do you deal with the topic of defense?
Pawan Parakh: We, we’ve played fair in my previous role and in my current portfolio, as of right now, we don’t have much of a defense. But the only reason we don’t have a defense is because we’re not very comfortable with valuations. Many of these companies are trading at phenomenally high valuations that we haven’t seen in many, many, many years.

But having that in mind, if we get a good correction, we will be buyers of these stocks. That is a long-standing story for us. India has shown very clearly that India has to be atmanirbhar in defence and you can see that in the consistent efforts that the government has been making either on the indigenisation side, which is import substitution to some extent or taking a more cooperative approach, which is also benefiting India.

India is not only doing offset work, but there is also some technology transfer to domestic players. On the other hand, very clearly, the government is committed to exports and we have shown that time and again by entering into agreements with Southeast Asian countries and several other African countries.

So this is a multi-year topic. This is no longer a sector of the past where you didn’t know what was going to happen here. But again, valuation is something we’re not very comfortable with. So we’ll chip in at the right time, but nothing yet.

(You can now subscribe to our ETMarkets WhatsApp channel)