Dhiraj Agarwal Prefers Banking, Capital Goods, Pharmaceuticals And FMCG For Investment

The pharma sector has not performed as expected in the last few years, but now there are reasons to be optimistic. Agarwal also believes that more than focusing on picking a stock or picking a sector, choosing a well-suited asset allocation is the best investment strategy
Dhiraj Agarwal Prefers Banking, Capital Goods, Pharmaceuticals And FMCG For Investment

Dhiraj Agarwal, Managing Director, Ambit Capital is bullish on banking, capital goods, pharma, and the FMCG sector, but says that not sector is all-weather. He, however, says that retail investors who want to invest their money should take the services of experts, because the market is now very dynamic compared to what it used to be.


Banking is his preferred sector, because it has “rebound, and now there are no non-performing asset (NPA) issues.”

“The quality of the health of the banking system is pretty good. In the near term, we probably see some amount of margin pressure coming in banking because we have seen loan growth running at 500-700 basis points (bps), which were higher than the deposit for a while,” he says.

He adds that when the rate cycle peaks out, the margin pressure will start showing up because, during the rising rate cycle, the asset gets repriced faster than the deposits.

“From a long-term point of view, I still think banking will be a top-winner sector. Once this little bit of margin gets digested over the course of the next few quarters, both linked to the capex drive of the government, the health of the balance sheet of the banking system, and the topping of the interest rate cycle, all three factors put together will result in reasonably decent growth of banking,” he adds.

Capital Goods

The capital goods sector comes as his next choice for investment. The sector is going doing well in terms of valuations.

Agarwal adds, “The capital goods sector is performing very well if you look at some of the high-quality names within that sector. They are already trading at a valuation which is like 20-30 per cent higher than their historical averages.”

He prefers to divide the market into two parts, which are near-term, 6-12 months, and long-term, i.e., more than 12 months. In the near term, he expects the market to be range bound so that the sectoral movement gets priced in.


The pharma sector has not performed as per expectation for the last few years, but now, he has reasons to be optimistic. He says, “Another sector that we are finding very constructive at this point of time is pharmaceuticals.”

He says that the earnings erosion in the US generic prices is now in the 6-8 per cent bracket, which used to be 12-15 per cent earlier. In fact, earnings in the generic pharmaceutical companies came ahead of estimates by around 5-7 per cent.

“It has underperformed for 2-3 years, and the last quarter was the first in the last 7-8 quarters that the pharma sector earnings did not disappoint,” he says, adding that he is optimistic about its future.


On the question of FMCG, Agarwal says that he sees a good tailwind for the FMCG sector in the short term. “In the next 6-12 months, it is likely to do well,” he says.

The gross margins of FMCG companies were declining quarter-on-quarter (q-o-q). For instance, Unilever’s margin fell around 500 bps year-on-year (y-o-y). In some cases, FMCG companies’ margins went down as much as 900-1,000 bps largely due to high input costs. He says that the input factors are now in reverse, Palm oil is down 25 per cent y-o-y. Also, many other ingredients of FMCG at this point are down between 20 per cent and 25 per cent on a yearly basis.

He says that companies have taken a lot of price hikes and he expects these price rises to get reversed to give a boost to volume.

“Historically we have seen that whenever FMCG companies has come out of a margin compression cycle, for some time, they have retained the previous price hike to boost the margin spread,” he says.

He also mentions that the spread between wholesale price index (WPI) and the consumer price index (CPI) also matters and this is what he watches closely.

“This typically gives a huge amount of margin power and pricing power to FMCG. The last hit actually happened in 2013-14. Prior to that, for almost a year, the WPI was ahead of CPI and then it had collapsed. And then, after that, those 2-3 years were the best in terms of the market expansion for FMCG. So, I don’t know whether this cycle will be that long, but at least in the next 6-12 months, FMCG is likely to do well,” he adds.

If you want to invest in the sectors, he has some preferences based on the current situation.

But, on the all-weather sectors, he says, “There are no all-weather sectors. Everything is a cycle, and the duration of the cycle may differ. One may still find a few of the companies, but all-weather also has an expiry date. It could be 20 years, 30 years, or, it could be 10 years. One can still find companies which can grow over a very long time to be confused for an all-weather in perpetuity. But there is no all-weather sector, each sector has its down cycles.”

He adds that it was far easier earlier to find a few all-weather or long-cycle names, which could make you money over 1-2 decades, but now the market has become very complex, as the disruption is coming from everywhere, from absolutely unknown names, and unknown start-ups.

And, finally, he says that allocation decision is very important. If one is bullish about pharma, the one can buy one of the various pharma funds considering it a part of your equity as well as asset allocation. So, more than just focusing on picking a stock or picking a sector, choosing a well-suited asset allocation is his final recommendation to all.

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