It seems Reliance focus is now changing to the traditional, oil and gas business and maybe that could see a series of announcements.
That is possible. A couple of years back, this news could have excited the stock because oil and gas was the main business of the company. Now this gas announcement will contribute just a couple of percent to the overall earnings and that too two-three years down the line.
In the past, most of the oil and gas upstream investments of Reliance have not really yielded much. We need to see when the production comes in and how much it is, but overall it does not move the needle too much and the reason the stock has been consolidating is that there was a huge euphoria around the new businesses. Now people are re-evaluating what actually is in Jio platforms and whether it is delivering what was promised. The possibility of a significant upside in Reliance in my view is remote in the near term.
On pharma space: Ride the wave or wait for a dip?
Dr Reddy’s is a preferred pick because most of its businesses are seeing traction and it has come out of the lull of growth in which it was stuck over the last two-three years. They are likely to do well over next couple of years both in terms of unique opportunities as well as the overall portfolio. It remains the preferred bet to buy on correction. Right now, after pharma and IT consolidated for some time, again the money flow has started towards those sectors. But on pure valuation, the upside is limited but the best opportunity still continues to be Dr Reddy’s. It could continue to trend up slowly.
In terms of value pick, if the turnaround continues, Sun Pharma could be another opportunity. It has moved up around 15-20% over the last couple of months but we need to see it is one large cap which is much below its earlier highs. If they can sustain that turnaround, then that could be some stock which is now under owned relative to where it used to be earlier and which could come back. The company needs to show consistency in earnings for at least two-three quarters.
On Infosys: Does it deserve to trade at a higher PE multiple?
In terms of Infosys coming back and getting back to the valuations it used to trade at earlier and reducing the discount with TCS, that trade clearly seems to be over. What is helping Infosys is that the management commentary has turned out to be significantly positive although in terms of total order booking, they are still significantly lagged behind TCS. One is the size difference.
Secondly, they are still lagged behind but then the management commentary has kept the stock buoyant. I would think that the catch up game is over. Now it will depend on performance. We need to watch out for next year’s performance and outlook. If these companies talk optimistically and then say that they are going to grow at 4% to 6% and that excites people, at a 35 odd price earning ratio and 4- 6% growth, the company is actually over valued rather than being fairly valued.
I think the technology news flow and the commentary of companies are more positive than what they are actually delivering. In 2021, the probability that the IT stocks will give very strong absolute returns is remote in my view.
