GARP Stocks Emerging From Cyclical Sectors Preferred Bets For Vinod Karki

Sustainable growth stocks continue to remain expensive despite the recent correction, making 'growth at reasonable prices' or GARP stocks the preferred ones in the current market landscape, according to ICICI Securities Ltd.'s Vinod Karki.

GARP stocks emanate from cyclical sectors such as financials, industrials, discretionary consumption, and I.T. services, the head of strategic research at ICICI Securities told BQ Prime's Niraj Shah.

While companies that exhibit sustained growth in earnings continue to have high optimism embedded in their market price, he said. These companies are largely asset-light and are from the consumption space, which has an element of 'dichotomy' attached to it, Karki said, as low-end, mass-scale consumption is still languishing because 88% of the workforce originates from the informal segment.

The investment and credit cycle is driving demand in the economy, Karki said. Therefore, companies catering to the investment cycle, such as capital goods, engineering, and steel companies, are also sustainable in the current landscape, he said.

Fundamental attributes of GARP stocks:

• Cyclical growth stocks with a leveraged balance sheet—Financials and industrials related to infrastructure and capital goods.

  Financials are at the cusp of a bottom in the NPA cycle, with overall credit growth remaining robust and industry credit recovering from a decadal downtrend. On the other hand, a recovery in the capex cycle is augmenting the medium-term growth outlook of industrials involved in the capital goods and infrastructure sectors.

• Cyclical growth stocks within consumer discretionary—Auto original equipment makers.

• Defensive stocks with moderate growth or mean-reversion in profitability—Tobacco and information technology.

Key Themes

Capital Goods

• Growth has started showing up.

• The investment cycle is largely driven by the government's impetus on spending, which is about 15–16% of the overall gross fixed capital formation. The largest part of the GFCF is driven by real estate investments by households (25%).

• IT and telecom capex within the services segment continues to be sustainable.

• Investment demand within the industrial space will pick up as the current capacity utilisation is much higher than its average volume.

• The investment cycle has bottomed out and is on the verge of rising.

Auto Stocks

Chip shortages and supply constraints had kept these stocks in a volatile space for a year now, said Karki.

But some factors to keep in mind are whether their recovery and growth in the auto sector appear to be sustainable, with the stocks being reasonably valued for their growth at a reasonable price.

"From the GARP strategy perspective, autos look good, especially those under capital goods," he said.

Ferrous Stocks

Ferrous stocks are more vulnerable to global incidents. But with China opening up, the prices of these stocks seem to be stabilising, Karki said, even as domestic demand remains strong.

Risk to consider

"As of now, factors such as the behaviour of commodity prices, the softening of wages, uncertainty in the job market, and housing rates hint at quantitative tightening approaching its peak," Karki said.

The key risk thereby is a 'downgrade' in growth expectations due to the ongoing global banking crisis and rapid quantitative tightening cycle of last year, especially for stocks exposed to global demand, he said.

Watch the full interview here: