On if there is any harm in going short
There are two things one needs to do. One is that you need to generate cash in positions where you make a huge amount of money. For example, we did that in Page Industries and Asian Paints last week. In August, when I bought into this stock, Asian Paints was Rs 1,750, Page Industries was 18,000. These stocks are 45-50% up. I was expecting these returns in one-and-a-half, two years! So that is one strategy where you achieve what you thought would be achieved over a long run, in a very short period of time and you cash out. That should be the first thing you would do in a market which is rising in such a euphoric manner rather than shorting, because when you short, you have to have the ability of riding out any frenzied move which could happen. So if you go short and the market continues to rally another 200-300 points, then you are looking at that position every day and then you think that no this is wrong and let me get out and then at the time you get out maybe the market starts falling.
So, my preferred strategy is to go into cash rather than trying to short. But there are some short possibilities in auto stocks where I think significant margin pressure will come up because a large part of volume growth uptick is behind us. Now we are in a lean season and the impact of the commodity rally on margins has not yet been built in most analysts’ projections. That could be one segment where the possibility of a downside exists but whoever does it, has to have the ability to hold on.
What if IT growth surprises us next year? Is cost saving factored in?
It has already been factored in. Now the challenge will be that can SN&G costs remain low for a prolonged period of time? Eventually there will be some companies who will try to think that let us increase the SN&G cost and try to capture more market share because others are not doing it and then the competitive intensity will start across industries.
This year was about cutting costs and trying to retail profitability because most companies did not expect the bounce back or the revival cycle to be so strong. Now that the revival cycle has been strong in the sense of getting back to pre-Covid levels and not going significantly above that, then will the companies persist with the same strategy? I expect a lot of FMCG companies to start spending aggressively to gain market share and compromise on margins in the short run because they look at capturing growth and that will happen across industries and IT will not stand aside.
In case of durable cost savings in the form of work from home kind of structures, the new capital expenditure might fall significantly for IT companies. So cash flow generation will be stronger for these companies. We need to see how this will play out but I do not think there is the possibility of margin accretion from here. We cannot see significant margin increases because customers will also start seeing where these companies are saving costs and will start asking for lower costs. So, it is a mixed picture. Digital adaptation is for real. Many companies which did not even think of it, will have to do it and are doing it now and that will keep on getting traction for these companies but traditional businesses will keep on declining.
So whether they can get out of this 4- 6% growth or not will determine how the stocks will do. If they can go to 9-10% growth, then there is still upside left in these stocks. If they cannot, then they are in the fair range adjusted liquidity because if Rs 3,000-4,000 crore keeps on coming in every day, the stock tends to trend up in the short run but whether that will be sustainable is something we need to see.
