Your report talks about a strong show likely for domestic plays like metals, cement, healthcare when it comes to the PBT performance. Just walk us through your rationale. Why do you think that nearly 70% of the companies are going to see a strong healthy YoY profit growth?
We are talking about this particular quarter and to an extent we need to ask how much of this is baked in. Last quarter was largely backed by the commentary from companies. Nifty had one of the best quarters with about 25% return in one quarter. So this was expected to an extent. It was part of the commentary which came out last quarter and said the October to December quarter will be stronger.
This is a quarterly preview. The more important thing will be for further significant returns on the Nifty from here on. It is not just delivery on these numbers but the commentary beyond that on how much comfort is there. There was this lack of clarity on how much of the demand was bunched up ahead of the festive season as we were in a lockdown before that quarter. So, how much of that is continuing demand has to be seen and that is something which will matter much more than just the pure quarterly numbers.
For example, the first few reporting results are very strong numbers but the reactions may not be as strong. So, it is not just delivery on those numbers but the comfort that one gets on the future commentary which will matter much more. If I were to look at domestic plays now, I mean domestic plays ex-financials. It does not include the commodity sectors like oil and gas, steel and all few global commodity sectors. So pure domestic plays will be one of the strongest quarterly performances on PBT, but one of the reasons for that is also because we are seeing the reduction in telecom losses and that is causing PBT growth to be much better.
From that perspective, the quarter is going to be strong. The important thing is what about the commentary? We have not seen too many instances of two continuous quarters of Nifty, EPS upgrades.
And with a lot of headway being made on divestment, what is your view on the PSU pack given that they are trading at big valuation discounts?
One commendable thing that happened last year is that finally the government understood that the ETF strategy they were following was not really the best one when it comes to stock performance and that is one of the reasons why there was perennial overhang on these stocks. Sooner or later there is going to be more supply and that supply is going to come at a discount.
The fact that we are not seeing any ETF from the government during this fiscal comes at a time when the government was really pressured to increase revenues. It is clearly very encouraging. From that perspective, the right step has been taken for a big overhang to be taken away from the PSUs.
One thing that I would bring out is although Nifty is very expensive, there are about 30% of Nifty’s constituents which are trading at over 10% discount to their own historical multiples. It is dominated by two kinds of companies; a) PSUs and; b) companies with ESG concerns. ESG concern is something which is going to become more difficult over time. Only if the ESG ratings are upgraded, would a lot of foreign funds be allowed to invest in those companies.
But in case of PSU privatisation, there is some talk of the government looking to monetise non core assets rather than sell shares at a discount on an ongoing basis. If there is more action around that, then there could be further incremental positives for PSUs and certain power names which we like within that space.
Financials are likely to be sensitive when it comes to earnings. Where else would you be focusing your attention this season?
There is this theme of earnings growth. I will do a little bit of a drill down there. India is the second best earnings growth story after Korea but Korea started 2019 with a big decline in profit and on that base they are rising. But where is India’s earnings growth coming from? There are three top names — two private banks and also the biggest name in the country which contribute nearly 70% of the incremental earnings growth. These do not have more than one-fourth weight in the Nifty but they contribute 70% of the incremental earnings growth. It is really these places that we need to look at and see if the delivery which happens is in line with those expectations. So those really the three or four, five names along with the IT names which are the biggest contributors.
You have talked about being stock selective, but are your portfolio picks simply a little risk averse or do you see the momentum a little slower in the midcap part of the market?
Honestly, it is a very bottom-up portfolio rather than playing any particular theme. I am a little nervous about the expectations. They are going after very strong commentaries and I would want to be more aggressive if we see January, February, March indicators surprising on these high expectations. We are not seeing big earnings downgrades. I have reasonable aggressiveness in some ways but it is more balanced in terms of the portfolio. I would say that is the approach that one needs to take.
The markets could rally much more and pay less heed to valuations and in fact in many of our conversations, valuation is not even coming as a big concern. I do not know if that is a symptom of a typical bull market where towards the end of the trend, you want to completely ignore valuations. So it is really where the disappointment will happen.
This year could be dichotomous in a way like last year where the economy was languishing but the market was doing well. Here the economy picks up but maybe at a slower pace than where the expectations are and the market does not do that well. It could just be mean reversion that we see and there could be a little bit of a reverse from last year.
