Why Kenneth Andrade is going contra, avoiding defence and PSU stocks

Kenneth Andrade, Founder & CIO, Old Bridge Capital Management, says the breadth of the market in the non-capital, non-capex infrastructure and industrials is narrowing significantly to stocks and not to a particular industry. I am extremely favourable on the commodity side of the business because what we see on every single element – be it defence, power capex or putting up of commodity capacities across the entire world, is trending towards all-time highs.”


Right now, your approach is very bottoms up, it does not matter what the sector is doing, does not matter what is happening to the macros, because if you have got names like Aurobindo Pharma, InterGlobe, Radico Khaitan, Prestige, IEX, they are just not related, it is not like you are betting on financials or you are betting on IT or you are betting on consumer, you are simply betting on companies.
Kenneth Andrade: I think the big macro trade or the directional trade is obviously going to be capex and industrials and one has to go down and do stock picking. Look at one of the index heavyweights banks and IT both together and if you break up the companies out there, every single business out there, it is more stock picking out there than actually saying that the industry is going to do well.

So, you are right in that way, the breadth of the market in the non-capital, non-capex infrastructure and industrials is narrowing significantly to stocks and not really to a particular industry.

Where do you think the global cycle is headed per se because that is important for us to understand how sectors like metals, exports and pharma would move?
Kenneth Andrade: What is happening in India is also happening across the world. If you look at globally what stocks are doing well apart from what is happening in the US which has all the eyeballs, the industrial side of that market is extremely robust. So, let us put it this way, global GDP growth is held up by defence. It is held up by industrial capex which is putting in an enormous amount of power, governments are going to be the largest spenders and consumers are taking a backseat for a couple of years as inflation raised its head.

Now, when governments put their balance sheets to work on the capex side or on rebuilding their entire industry and taking capacities back home, they have to generate cash from somewhere and that is where the inflation cycle is actually. I think it is a little bit about everything. I am extremely favourable on the commodity side of the entire business because what we see on every single element – be it defence, power capex or putting up of commodity capacities across the entire world, it is trending towards its all-time high.

The IT numbers are claiming that order books are at a record high, which means business is coming. But if I look at the execution and it is not a Q1 phenomenon, it has been four-five quarters where orders have been strong and that is not getting translated into real volume growth. Would you buy into the commentary and the optimism or the optimistic picture some of the IT companies are painting?
Kenneth Andrade: If you look at how all of these companies actually ramped up, you saw a significant amount of hiring by a lot of these companies post Covid in expectation that all this order book would actually ramp up and to an extent I am pleased to see the fact that these numbers have not ramped up and now they are actually cutting headcounts. So, the growth in headcount is not as much as it has been in the past. Whenever these orders ramp through, you will have two things playing out.

You will see costs going steady and revenue is coming back again. Now, whether it is going to happen in this year or whether it is going to happen in next year or even probably in 2027 that will happen. I cannot time it, but the numbers are good, the balance sheets are strong, it is a fairly mature business, so you would not expect any of these companies to hit it out of the park.

If I go back to the past track record, most of these companies have doubled every once in five years. I do not see that trend changing anything very significantly from what we have seen in the past. So to that extent, most of them will happen because we are the largest in the world as far as IT outsourcing is concerned. That is going to remain a static phase and the growth will come in a year, maybe two.

You do not own defence. You do not have exposure to PSUs. Now at a time when defence and railways are two sectors where capex is the strongest and PSU companies would be the big beneficiaries because this is a government backed capex, the government is spending a lot in building the new India, why have you shied away?
Kenneth Andrade: We have preferences on how to play this entire cycle and we are more clear on how to do it on the commodity side of the business because that is where you have huge free cash flow generation. We stick with that cycle. Anything which is private sector capex, we have aligned to that entire market place.

Any reason why there is no Zomato or a Paytm or a Policybazaar in your portfolio? They are also the future businesses.
Kenneth Andrade: That will come through, but we are biased on the second cycle. We see these markets mature. We will see these markets correct themselves because every business is cyclical in nature. You are seeing what is happening in consumers at this point in time and we have had virtually no consumer stocks and like I said, the valuation actually flipped in favour of these companies today. All of these are on our tracking radar. But we will choose where to allocate capital in these businesses when we do not have to guess what the future is going to be like.

At the current juncture, the general view is that smallcaps are reaching a “bubble” zone. Does not matter what the colour of the company is, does not matter what the business cycle is, smallcap is bubble and trouble. Is that a very myopic kind of a view?
Kenneth Andrade: I spent most of my life watching this space whether it is smallcaps or midcaps and I have seen this come up in the past as well. You got to tread carefully when you head into allocating money to all of these companies. And to be fair, the risk in this category of businesses is extremely high. So, buying at high valuations is not something that I subscribe to. So, when you are in this industry or when you are in this category of companies, you have to be very cognisant of the fact that you got to buy with a very high margin of safety and you need to know what you do.

So, this is a place I choose to be in because this is essentially where you get the hundred million dollar companies becoming billion dollar companies and there are enough minefields out there. The valuations are high on a broad basis. I would like to see this category of companies actually consolidate. I would expect this year to be quiet for this segment of the entire market.

Till now it has been reasonably quiet still and in 2025 I do see a large part of these industries from these small companies, from this segment of the market getting back to profitability which is reasonably large.


One of the core of investment philosophy is to buy a monopolistic business. You like to buy companies which will gain because of consolidation in the sector. Can you give us a sense of where you think big monopolies or moats are getting created in this economy?
Kenneth Andrade: The first thing you look for is where capex stops and if you go back to 2015 and 2020, I do not think you saw a single new power plant come up and that is where you have got the power right now. If you look at what is happening in some parts of the consumer verticals and airlines is a big case to it, entertainment and to an extent media is a big case to it.

Telecom is a large example of all of this essentially happening. These are places where capex stopped or there was no new entrepreneur getting into a new industry and one would consistently have to go out there and look for something like this happening. Now, my sense is that the chemical market is fairly stressed not just in India but across the entire world and specifically agrochemicals, so that is one place that you could have this happen over the next two, maybe three years.

The consumer space and you would see it in the valley of the entire market where middle class India is relatively stressed in terms of income levels, compared to where inflation is and also where household debts are. This part of the mid market or the middle class part of the entire market is where they are cutting back on expenditure. I am not saying that they are consuming less. What you can see with all results is that there is an element of down trading that is happening out there and this is where we think you would get consolidation happening. Investment in that cycle is going to narrow down completely, so that is a space that I would watch.

Also, valuations out there will also react given where the environment is. So, markets have a lot of investors out there that are more growth oriented and which is why capital moves in droves. It includes the lenders, it will always go for the marketplace which is growing the most. We watch those spaces that will come through. It is an extended cycle and we will have to wait for two-three years before you can get something significant to buy. This is not my market. I am not going to get anything which is going to be significant at this point in time, significant movers or consolidating businesses at this point in time.

There are a lot of themes which in a sense are becoming very popular themes. One is EV, then there is energy transition, then there is climate change. Would you be playing at these so-called multi-billion dollar companies, multi-billion dollar themes now?
Kenneth Andrade: No, we are not participating in most of them. The easiest way to invest or to allocate capital is into businesses which appear to be large and have no cash flows, but we are not really there. We have not cracked the code on how to look at a large opportunity and then build a portfolio into it. We are more on the cash flow side of the entire business. We like to see businesses make money which is why we usually come into some of these big opportunities when it is in their second cycle and not in the first cycle.

At what time the trade-off move out of capex to consumer will be at play?
Kenneth Andrade: Do not ask me, that means 5 years plus on this one.

So, you will wait for 5 years plus for the trade to reverse, is it, I did not get the last point.
Kenneth Andrade: You asked me when the trade will reverse… it will take its time. In the previous cycle when it flipped itself over, it took almost a decade plus, so do not expect things to happen so soon. So, you got to give this time.

History has taught us that the leader of a bull market will remain a leader. You may argue about valuations, you may say okay it is above the comfort zone at which a fund manager like you would like to buy. But the leader in a bull market can go to crazy numbers before the bull market ends. Can I say that is where capex and this investment related themes are?
Kenneth Andrade: Yes, fine, but that is guesswork. We are not in the business of that. So, one of the statements that I usually make is, our business is to buy efficient capital at a price and everyone can get the efficient capital, but what price are you paying for it? Those are the question marks that we ask ourselves and which is why we tend to always be in the non-consensus part of the market and maybe a little early, but that is the risk we take.

Consensus trade according to you right now is pharma. Can I say that?
Kenneth Andrade: That is a continuing trend. Look where IT is today. It is the largest outsourcing platform for anything that is happening in the world and look at generic pharma or pharmaceuticals that is there. It is just mapping that entire cycle that IT has been through. It has got cash flow. It is the lowest cost manufacturer. It is getting market share.

The international businesses, any generic business in the US is extremely leveraged. The balance sheets are in Indian companies' favour. The interest rates in inflation and interest rates going up are against the US. So, it is a simple trade. We have got the capacity. We have got both. We have got the physical capacity. We have got the financial capacity. The US businesses have none and that is how it looks like going into a couple of years.

So, it is a small trade. It is not anywhere large as far as the indices are at this point in time. It is nowhere close to what the…, I mean, if you take up to 2035 the capex cycle, it looks huge. This is a relatively smaller part of the entire format. But we like it because they are large companies and valuations I can still argue that they are okay.

Coming to the construct of the market, earning cycle and where valuations are, if one looks at your current portfolio, what is in public domain, Aurobindo, InterGlobe, Radico Khaitan, do you see them changing radically in next year or so or are you happy to stick to these stocks and you see earnings visibility for next 3 to 5 years in this current portfolio?
Kenneth Andrade: As far as the discretionary and consumer names go, very few names are out there. But back of the envelope, there is a migration of their business models and the migration of the business models is to get customers who can pay and that is the top end of consumers. If you look at where India is or any of the large developing to developed nations are, these are categories that have done extremely well. So, we have got the numbers out there, we have got the products out there.

You can see the movement in each of these product pricings. I am a firm believer that any company out there who gets pricing power will get price earning multiples. Any business that is struggling to get pricing power, that is a place that you will have to watch out for on the other side which is probably not going to enjoy premium multiples. So, some of the names that you mentioned out there, some of the portfolio companies that we have there, have got pricing power, have got very little competitive intensity in their category and cash flows are significant.