Deepak Shenoy Remains Cautious on Tobacco and QSR Valuations Amid Market Shifts
Capitalmind's Deepak Shenoy provides comprehensive market insights, emphasizing caution on tobacco sector due to declining volumes and policy risks, warning against expensive QSR valuations amid evolving competition, while highlighting electronics manufacturing as a massive opportunity supported by government incentives and lower rates. He favors PSU banks for stable performance and sees power sector opportunities shifting toward distribution themes.
*this image is generated using AI for illustrative purposes only.
Deepak Shenoy, Founder & CEO of Capitalmind MF, provided comprehensive market insights across key sectors during a recent ET Now interview, highlighting both opportunities and challenges as Indian equity markets navigate multiple structural shifts and policy changes driven by evolving fundamentals rather than broad-based themes.
Conglomerate Restructuring Framework
Shenoy outlined a strategic framework for large conglomerates pursuing asset monetization, emphasizing the importance of structural clarity as businesses scale. He noted that successful conglomerates must decide whether they function as holding companies or operating entities with multiple non-connected investments.
"We have seen some of these investments actually divest by splitting their company shares by demerging from the larger entities, and I expect that to happen, that is in the best interest of shareholders," Shenoy explained. He argued that cross-holdings often dilute transparency and that creating large monolithic entities proves counterproductive. Once newer businesses mature, independent listing becomes essential, as "the sum of the parts here will be greater than the whole."
Tobacco Sector Faces Structural Headwinds
Following recent excise duty announcements, Shenoy expressed significant caution regarding tobacco sector prospects, identifying multiple structural challenges facing cigarette manufacturers that extend beyond immediate policy impacts.
| Challenge Area: | Impact Details |
|---|---|
| Volume Decline: | Reduced smoking behavior, degrowth expected |
| Consumer Shift: | Migration to alternatives like vapes |
| Policy Risk: | Government tax extraction capabilities declining |
| Revenue Pressure: | Dwindling tax revenue from cigarettes |
| Diversification Need: | FMCG, hospitality expansion required |
"First people have reduced smoking in general. The overall numbers and volumes over a long period of time have grown lesser and lesser every year and they will degrow as time goes by," Shenoy observed. He emphasized that the government's ability to extract taxes from cigarettes is diminishing, making diversification into FMCG, hospitality, or other business segments essential for companies solely focused on cigarettes.
QSR Valuations Appear Stretched
Shenoy highlighted the fundamental evolution of the quick service restaurant category, noting that delivery platforms have completely transformed traditional business boundaries and competitive dynamics.
"What was a quick service restaurant is now quick service offering through the restaurants themselves," he explained. While acknowledging long-term sector opportunities, he cautioned against current valuation levels. "I feel at this point most of the QSR listed players just tend to be a little more expensive," adding that rising competition could pressure returns going forward as the sector matures.
Electronics Manufacturing Shows Strong Promise
The electronics manufacturing sector received Shenoy's most constructive assessment, supported by favorable policy measures and improved monetary conditions that create a compelling investment environment.
| Growth Driver: | Supporting Factor |
|---|---|
| PLI Schemes: | Government incentives boosting capex |
| Interest Rates: | RBI rate cuts in December |
| Market Potential: | Massive long-term opportunity |
| Investment Horizon: | Decade-long journey ahead |
| Policy Support: | Sustained government backing |
"There are two things over this, the PLI, the incentives that the government is giving and secondly lower interest rates after RBI cut rates in December," Shenoy noted, describing electronics manufacturing as a "massive, massive space going ahead," though emphasizing it remains a long-gestation opportunity.
Sectoral Preferences and Strategic Outlook
Shenoy's sectoral preferences reflect a nuanced approach to current market dynamics, emphasizing structural shifts over momentum plays.
Power Sector: Investment cycle shifting from generation to transmission and distribution upgrades. "I like the distribution theme a lot more right now," he said, pointing to last-mile transmission, metering and equipment manufacturers as key beneficiaries, with distribution theme preferred over nuclear energy in the near term.
Banking: PSU banks expected to outperform due to stable margins, broad deposit franchise, and potential treasury gains. "PSU banks have probably done fairly well," citing their structural advantages. Smaller private banks may deliver positive surprises, while larger private lenders face muted performance until credit growth improves.
Automotive: Recent strength attributed to GST cuts in September and lower interest rates improving affordability. "From an auto sector perspective my views largely stem from the cut in GST that happened in September," he explained. Preference order remains four-wheelers, two-wheelers, then commercial vehicles, with tractors dependent on monsoon conditions.
Shenoy's comprehensive analysis underscores a market increasingly driven by structural shifts, policy incentives, and sector-specific fundamentals rather than broad-based themes, reinforcing the importance of selective, long-term positioning strategies over momentum-based approaches.
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