Defence, Power themes attract interest, but challenges persist: Anand Tandon

The recent surge in equity markets has caught many investors off guard, prompting a more cautious stance among market participants. Despite the strong recovery, concerns around valuations and unresolved geopolitical tensions continue to linger beneath the surface.

Sharing his perspective, market expert Anand Tandon noted that the pace of the rebound has been unexpectedly fast. “Not a whole lot. The market has had a rocking recovery, much faster than at least I expected and perhaps some of the people in the market. At this point of time, you need to kind of hold back a bit and see where it goes from here because it has reached back to levels where it was before we had the geopolitical issues in West Asia, and those have not been sorted out, whereas the market clearly thinks that they have.”

FMCG Gains, But Valuation Questions Remain
The fast-moving consumer goods (FMCG) sector has recently seen renewed investor interest, largely driven by strong earnings from major players. However, the optimism may be tempered by valuation concerns.

“Obviously, the numbers have been good. But if you look at the overall growth, we are still looking at 12% odd growth year on year. So, it is not exactly performance which is going to do a blowout. Now, the forecast obviously is a lot better. You are looking at perhaps more than 20% growth in the year ahead. But you have a company which still trades upwards of 40 PE, so it is not exactly cheap. I mean, there is a small company which trades somewhere in the world called Nvidia, which trades at 17 PE and grows at 50%.”

While consumption-driven sectors have shown resilience, questions remain about whether current growth levels are enough to justify elevated market multiples.

Earnings Growth: Hopeful, Yet Uneven

Looking ahead, the outlook for corporate earnings appears mixed. The current quarter may benefit from favourable base effects, but uncertainties loom over the near-term horizon.

“So, I was saying that the consumer sector will probably show good numbers for this quarter. The challenge will be in the current quarter, in Q1 for the next year, where some of the impact of the war, etc., will come through, so that is going to be a bit of a challenge. In the current quarter, probably the fact that you have at least the initial numbers from FMCG, etc., gives you some hope that you will probably find decent growth there on a year-on-year basis. Whether that is enough for it to fire up the imagination of investors is a different story because, like I said, it is not as if it is exactly cheap.”

He also pointed to a broader concern weighing on markets: subdued earnings growth relative to valuations.

“Frankly, we have got an overhang on the market, which is that the Nifty continues to show very tepid earnings growth and the valuation continues to remain on the higher end of the valuation curve, both from the historic point of view as well as from the fact that relative to our other emerging markets, there is still a lot of the emerging markets which, despite having gone up much higher, are still trading cheaper and continue to show more robust earnings growth than we have.”

Defence: Long-Term Opportunity, Short-Term Constraints
The defence sector remains an area of structural interest, though challenges persist in domestic manufacturing capabilities.

“Defence is definitely one of the few places where you can expect to see consistent growth. But unfortunately, we are still some distance away from having companies which are actually making stuff in India in a meaningful way. HAL has made a lot of planes which do not have engines, and that is the kind of key problem that Indian defence faces—that when it comes to serious technology, we are still floundering.”

He further highlighted gaps in emerging segments like drones.

“We have more than 200 companies which have announced plans to come up with drones. There is only one serious company which can actually create defence-quality drones so far. So, most of the numbers that you will see are actually being spent overseas even today. So, still early days yet, and the valuations are already skyrocketing, but that said, it is certainly an area which not only in India but globally will continue to remain investor-friendly.”

Banking Sector: Stability with Caution
Private sector banks continue to be viewed as relatively stable bets within the financial space, supported by strong balance sheets and better liability profiles.

“They are reasonably well positioned and relatively cheap. You have to, of course, keep in mind the fact that we are probably at the best end of the cycle. You have a situation where the balance sheets are the cleanest, NPAs are the lowest, and therefore the only pressure really is on the NIM and the ability to raise more deposits.”

“To that extent, private banks have an edge over the public sector banks because their liability profiles are much better and they are able to get more retail customers. So, generally positive from that sector, and given its weight in the index, at a portfolio level there is no reason why you should not be having them.”

Beyond banks, Tandon expressed a preference for life insurance businesses as long-term plays.

“Banks are an obvious choice, but otherwise the asset side of the business is also looking good. I personally prefer life insurance companies. You have to look past quarterly ups and downs—that is a long-term kind of call that one is making—and therefore, again, the likes of SBI Life or ICICI Pru are companies that can do well.”

Power and Batteries: A Structural Growth Theme
The energy transition story, particularly around batteries and renewable infrastructure, is gaining traction. However, execution challenges remain.

“From an Indian perspective, the fact is that there will be a large demand for batteries going forward, especially for renewable power. Now the government has kind of mandated that all new capacities that come up have to have battery backups. The only question is what technology to use and where you are going to get it from and how dependent you are on China for any of those.”

When it comes to the broader power value chain, transmission emerges as a preferred segment.

“So clearly, batteries, renewable is one theme which is going to do quite well. More than generation, I prefer transmission. You have generation capacity which will have a kind of fixed upside, whereas transmission can continue to grow. We need a lot more transmission, and therefore all suppliers to transmission companies will continue to see fairly robust performances, at least in terms of the order book.”

However, rising input costs could weigh on near-term profitability.

“The challenge, however, is that you will have fairly high commodity prices in terms of the inputs. So, you may find that the near-term performance for some of these suppliers at least may become a little weaker in the next few months.”

The Road Ahead
While pockets of opportunity remain across sectors, the broader message is one of cautious optimism. Strong rallies have priced in much of the near-term good news, leaving little margin for error.

Investors, it seems, may need to balance growth expectations with valuation discipline as markets navigate an uncertain global and domestic landscape.