Capitalmind Founder and CEO Deepak Shenoy has voiced support for proposed regulatory reforms targeting insurance commission structures, acknowledging that while the changes may create near-term challenges for distributors, they could ultimately strengthen the sector by better aligning incentives with consumer interests. Speaking on ET Now, Shenoy also addressed concerns about India's retail sector, where companies face the dual challenge of maintaining high valuations while experiencing slowing growth despite improving margins.

Insurance Commission Reforms: Consumer-Centric Approach

Shenoy emphasized his hope that the proposed changes to insurance commissions would be implemented from a consumer perspective. He highlighted that payouts in general insurance, particularly during the first year or two, are substantially higher than most other financial products when measured as a percentage of commissions. This structure has historically influenced distributor behavior, skewing focus toward insurance products offering higher commission rates.

The Capitalmind CEO explained that despite growing awareness among both consumers and distributors, very few products currently allow distributors to voluntarily accept lower commissions in exchange for better customer deals. He noted that meaningful change would require industry-wide regulatory intervention rather than individual negotiations.

Impact on Industry Stakeholders

The proposed reforms would affect various industry participants differently, according to Shenoy's analysis:

Shenoy explained that while overall commission earnings may remain similar over longer periods, the shift away from front-loaded payments would create immediate cash-flow challenges for distributors and brokers. Insurance companies, built with long-term horizons of 40 to 50 years, would be better positioned to weather the transition compared to distributors who rely more heavily on ongoing cash-flow-based incentives.

Retail Sector Valuation Concerns

Turning to the retail sector, Shenoy addressed the challenging dynamics facing listed retail companies. He expressed concern about high multiples in what he described as a highly competitive industry, noting that competition typically compresses margins unless growth slows. In the current environment, margin expansion appears to be occurring at the cost of growth.

The increasing competition from quick commerce and online players is fragmenting consumer purchases across multiple platforms rather than concentrating them among established large players. This shift results in individual retailers reporting lower growth even as the overall industry continues expanding.

Margin Dynamics and Investment Outlook

Shenoy observed that as consumers migrate low-margin purchases such as daily groceries to alternative channels, traditional retailers may experience margin expansion in their remaining product mix. This occurs because higher-margin categories account for a larger share of their sales portfolio.

However, he cautioned that while this dynamic can boost EBITDA and profitability in the short term, it does not justify high valuations. "This is not useful for a high multiple," Shenoy stated, emphasizing that high valuations require sustained growth alongside stable margins rather than margin protection at the expense of growth.

He warned that an industry overly focused on protecting margins rather than creating incremental value for consumers risks disappointing investors over time. Given the stretched valuations in the retail space, Shenoy indicated he would require significantly lower prices to justify the investment risk at current levels.

While competitive dynamics may eventually benefit the retail sector as a whole, Shenoy noted that individual players may not necessarily see improved economics, making the investment case challenging under current market conditions.

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.

"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.

"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.