Let us now talk about India’s strategic sectors, the ones that will pave the way for the future. By that, I mean semiconductors and defence. The government is speaking extensively about these sectors and planning for their development—not immediately, but over the next five to ten years. Specifically, considering semiconductors, new-age technologies, and defence, how do you see the growth of these sectors?Manish Gunwani: These are very promising sectors, but they are also well-explored. Honestly, the challenge isn’t their growth prospects—these are obviously multi-year growth themes—but rather the valuations. These sectors have demonstrated strong growth over the last two to three years and are already well-owned. So, achieving a good risk-reward balance is difficult. We do have selective exposure, but being massively overweight in these sectors is challenging at this point.
I want a clearer understanding of how one should approach sectors like consumption and auto. If we look at FMCG earnings so far, there has been only a marginal recovery; overall, performance has been rather flat. FMCG staples haven’t done exceptionally well either. Last time we spoke, you mentioned that autos also look expensive. So, at a time when the government is announcing several tailwinds, should investors focus on earnings and valuations, or should they just look at future potential and invest in these sectors now?Manish Gunwani: It’s a bit tricky. As the government shifts focus from infrastructure to consumption, one might want to play the consumption theme. But the question is how. As you noted, some sectors, like staples, seem expensive. In autos, it’s less about valuations and more about long-term trends—technology and brand leadership—which remain uncertain. One way is to invest directly, but indirect approaches, such as through financials or internet platforms if you want exposure to consumer discretionary, may be structurally better than direct plays.
When you talk about platform plays, we know there’s more paper waiting to enter the market. But within the existing pool, how do you deal with valuations, given that many of these plays have already seen significant run-ups?Manish Gunwani: The stocks have performed well, but the appeal of internet platforms lies in long-term margin potential. Historically, when these platforms were small, margins were X, but as they scale, margins can become 3X, 5X, or more. Predicting long-term margins is difficult because these businesses tend to be “winner-takes-all”—most profit goes to the number-one player, giving them strong pricing power. From a three-, five-, or ten-year perspective, some platforms can surprise. Additionally, technology platforms can easily expand into adjacent areas, leveraging the same consumer base. Globally, many fintech platforms began with broking, insurance, or lending, and later cross-sold additional services. It’s important to consider the full addressable market opportunity.
There’s often a comparison between benchmarks and the broader market. While benchmark stocks are generally large, midcap and smallcap valuations remain elevated and may need further correction. When constructing a portfolio, what’s your take on this comparison?Manish Gunwani: You’re correct—the broader market, in aggregate, is expensive. I personally find 60-70% of it difficult to invest in due to valuations. However, we are fortunate to operate in a fast-growing economy with a large universe of stocks. If we consider companies with at least a $500 million market cap and high growth, there could be 400-500 options. Selecting 50-75 companies from this pool could outperform the headline index over a three- to five-year horizon because growth themes are emerging—defence, semiconductors, AI, China-plus-one strategies, global power capex, and more. Going down the market-cap curve and picking quality stocks is still worthwhile rather than avoiding midcaps and smallcaps altogether.But surely there are pockets in the market where valuations are still frothy?Manish Gunwani: Absolutely. Many hotels, hospitals, cement companies, and other capex-intensive stocks trade at PEs of 40, 50, or 60 despite minimal free cash flow. A lot of consumer discretionary stocks are also expensive. Even if the consumption story revives, India’s growth is tied to the global economy. Assuming nominal GDP growth of 10-11%, I find it hard to justify paying 70-80 PEs for companies growing at 8-10%. So yes, roughly 60-70% of the market remains challenging to invest in.
