Vartak said the domestic-oriented portfolio is geared towards capex, while export-oriented include the “niche” pharmaceutical segment and real estate. The valuations, he added, for these segments are pretty reasonable.
“I wouldn’t say that they are really attractive or really expensive, they are somewhere between, which is fine,” Vartak said. This because the fundamentals are “way better that average, so average multiples are okay for that”, he said.
Vartak said that his highest conviction is for any business which is capex-oriented, such as building materials or capital goods. He positioned real estate and its ancillaries in the second, while API and CRAMS were his third choice.
The active pharmaceutical ingredient segment and contract research and manufacturing segment, which is anti-consensus now, is getting reasonable valuations and the growth hasn’t slowed down, Vartak said. “API and CRAMS players could see sharp earnings growth over the next couple of quarters.”
There is a long-term potential for API players given what is happening in the Russian and Europe, he said. The two important qualities that customers ponder on while giving order to API makers are — efficiency and competence, and capacity. Vartak pointed out that there are only two-three players in India that have both these qualities. Those type of companies could see a lot traction, he said.
For real estate ancillaries, Vartak said, the valuations are not factored in versus the overall market. Plywood, MDF and tiles imports are almost down to zero, so that’s where demand has gone up, he said.
On defence, Vartak remains “skeptical” as there has been many “fake starts” in the past 15 years. The defence orders may flow through, he said, but the kind of profit generation is a question mark.
The government as a customer is a worry, Vartak. It is not clear that the recently broached talks about the Europe-plus-one strategy is a structural story or a short-term blip, he said.
Specialty chemicals, on the other hand, is a “good theme”, the investment manager said, but there is a need to be picky as they have become expensive. “It is important to ensure that the specialty chemicals are not just getting benefitted by global circumstances like what is happening in Europe of China,” he said.
“If you are convinced that they are the most efficient player, I think then that theme has lot of room to play out, especially if its niche specialty of niche pharma like API, CRAMS.”
With underperformers, Vartak said, “Investors need to be patient as it may come in the short-term for these themes, and take the risk.”
On automobiles, the investment expert prefers the consumable part, the ones which has potential for the next three to four years. Vartak said he stays away from players that offer one-time purchases such as engines.
“While in segments such as tyres or tyre ancillaries, lighting side, has potential over the next three to four years driven by electric vehicles push, the valuations are attractive,” he said.