You are saying that fair value growth has a strong correlation with GDP growth. Nifty’s fair value growth has plunged in line with FY21, nominal GDP fall. What does this essentially mean?
We have a fairly unique approach in assessing companies’ values and as a result, assessing the values of the market on a bottom-up basis. What does that research tell us? It tells us that a) fair value has a very good correlation with the nominal GDP growth, not that it is rocket science, it is fairly intuitive and this is also what is coming out from our study. b) It is based on what is happening all around us. The GDP growth rate has fallen, nominal GDP growth rate has plunged to negative territory and of course that is having an impact on the overall fair value of markets as well and because of that what we are seeing is that FY21 fair value has fallen substantially whereas the markets have been rallying. That is what the entire study is all about.
How would you advice investors to play this theme? Which are the sectors one can start to book profit and which are still looking decent?
The markets have now entered the expensive zone. They are no longer cheap and are reasonably valued. They are now starting to become more and more expensive and as a result, investors should invest in dynamic asset allocation products simply because these funds take away the entire emotional issue out of investing and help investors take a balanced decision. Even in the current market, most of the dynamic funds have cut their exposure in the market in line with the expensive valuations and hence investors are automatically seeing reduction in their allocation in these products. I would say it is pretty simple. Investors should allocate in these products.
A lot of people believe that IT and pharma essentially have seen a big re-shift in the way they were approached. What would be your perspective?
We agree with this perspective. The potential demand for IT services has undergone a significant shift and there is a material upward shift in the demand curve for IT services which is resulting in a significant revision in the fair value upwards for most of the IT companies. Hence despite the runup, these companies are not very expensive and they are reasonably attractive despite their good quality balance sheets and good businesses.
How would you approach the financial space? Does one have to be very selective in that space?
The financial services space predominantly includes banks. These are entities which are leveraged 1:20 or 1:15 and so you always have to be very cautious and very selective. Having said that, how are we approaching this sector in the current scenario? Just when the pandemic hit us, we were very sceptical. We had an expectation of material hit to this sector because this was the sector which was exposed to SMEs to retail but as time progressed, as more and more data came in, it was very clear that the impact on the sector was substantial, But it was not as much as was expected and was getting built into the stock prices. So, we have turned neutral towards the sector and we are no longer underweight in the financial services sector. We are very selective in terms of buying companies within this sector.
When you talk about the financial or any other pack, one has to be very selective unlike say a metal company where everybody would benefit from the price increase?
When a sector is in a bullish environment in an up phase, you would notice that the worst companies tend to see the best profit growth simply because these are operationally highly levered companies or even financially leveraged companies. However, when there is a downturn, such companies may even get wiped out. As an investor, I would be very sceptical about investing in poor quality companies which have a very high financial leverage in any sector because whenever there is a cyclical downturn, many of these companies would no longer be there for me to participate in the upturn. So yes, you need to be very selective.
How would you approach the healthcare space? Where do you think alpha will be created?
This is a sector which is very diverse and as you rightly pointed out, there are various themes within this sector. Most of the companies are reasonably good quality companies which do not have leverage and hence there is a lot of themes to choose from. For example, we have been pretty positive on the export theme and theme on companies which are in the CRAMS business and which are exporting. We have been pretty positive on companies which are exposed to the domestic formulations part of the business. These are the two themes which we are pretty positive within the overall healthcare space.
How would you look at the QSR space after the Burger King listing?
I would not approach any company with a very short-term perspective but yes QSR is a space which is doing very well and different companies are doing well in this space and there is a lot to choose from.
I would not comment on a single company but this space is attractive but it is also getting richly valued and hence the potential upside over a five and 10 years period is much lower than what we are seeing in many other sectors and companies.
