On M&M
In the last two-and-a-half months, global money has been pouring in and around $10 billion has already come in. This kind of money keeps looking for largecaps which are liquid and where there is a track record of corporate governance, promoters management practices and a decent business model. This is where stocks and sectors like these fit in.
The market keeps moving up. All of us have been trying to fathom when the correction will come and how far it will go. But at some point of time, it will come though we don’t know what the trigger would be. It could be the Budget, it could be the result season. Maybe global money allocations will change and the inflows stop.
Any new investor at this point of time also has to keep in mind that whenever the correction comes, they would be comfortable holding on to whatever they are left with. However, a market plunge is unlikely. That is where M&M kind of stocks fit in and that is where we are seeing on and off buying coming in.
In terms of fundamentals, till about four-five months ago or so, the stock had been a massive underperformer for 3-5 years. The main reason for that was low return ratios. That is when the management woke up and has been seen to be taking actions to improve the return on capital and that has additionally resulted in the market getting interested in this stock.
On OMC basket
Before coming to oil marketing companies (OMCs), let me talk about the public sector space in general. After almost four-five years of underperformance, market interest has returned to banking and non-banking PSUs for the last three months. The question is whether it is a typical high bull market phenomena where after the valuation of all other companies and sectors mature, the market starts looking for undervalued stocks or if it is a permanent re-rating for this sector.
Any permanent re-rating could only be for the reason that of late, there seems to be some awareness in the government as reflected by the DIPAM secretary’s statement about a month ago that they want to include three new criteria of evaluation of public sector companies. These are focus on non-core asset sale, focus on return on capital and focus on market cap.
If this focus comes in, then minority shareholders would start getting rewarded. Of course, the government itself would be the biggest beneficiary as they are the majority stakeholder and they are the ones who are out in the market to sell public sector companies. All this could lead to a permanent re-rating of the public sector companies.
I was not a very great fan of public sector companies till about a few months ago. But if these changes happen, then it is time to look for it and that is where we could be seeing the action in the public sector companies. Within OMCs, it is always difficult. What part of profitability they will keep as inventory, what part they will provide in this quarter, what part they will push to next quarter, all those are grey areas. So instead of focussing on OMCs which could be a good bet, I would prefer to focus on some other more consistent public sector businesses.
On Bharti Airtel
The whole telecom sector has been going through a sharp outperformance not only in terms of stock prices but also in terms of business fundamentals for almost one-and-a-half-year to two years. This came after a long underperformance of 3-4 years. The reason is obvious: The consolidation in the industry with only three players being left and as a result, they have been able to raise some prices coming together. The judicial overarch which was pending for some time was over sometime back but now again companies have gone back to court asking for some correction in the orders.
Post lockdown, the demand for data has been consistently going up and that is where the entire sector has seen growth. Within that, Bharti has been coming in as a top player in terms of ARPU, growth, data growth, number of subscribers, cash flows and profitability parameters.
Till about three months ago or so, the stock despite all these positives was consistently falling and had gone to about Rs 400 or even below that and from there, it has recovered well. If that kind of movement comes again either because of market correction or due to selling by some FI or index weight changes, we can expect some correction.
But other than that, the fundamentals for the sector and within that of Bharti are likely to continue to improve as the quarters go by and the stocks would continue to attract interest. I do not think for a growth story, valuations would matter in a market which is continuously seeing an inflow of money.
On metals basket
I continue to remain cautious in this space because I find it difficult to understand commodity price movements. But that does not mean the sector is not investment worthy. Whoever can understand or track the commodity price cycle should continue to look at these stocks. Over a longer period of five, 10, 15 or even 20 years, all commodities, especially metal stocks, have not given consistent returns. These stocks are not for a sleepy investor who likes to buy and forget the stocks in his portfolio.
The whole sector, especially the metals and the commodities in general, keep going through a cycle and so one has to be able to be smart enough to get in at the right time or at least closer to the right time and also be able to get out at the right time. These remain trading stocks.
When I say trading, it does not necessarily mean intraday, inter day or intra week or month kind of trading. It could be six months, nine months, a year or two. But for a really long period of time, these stocks have not given consistent returns.
Now prices are rising because of continuous demand for steel from the domestic as well as from the export markets. The same is the case with non-ferrous metals. Copper prices have been continuously going up. It seems that trend will continue for some time.
The surprising part is that industries which are metal users like automobiles, consumer durables, electrical, electronic appliances and things like that, are not being impacted and stocks from those sectors are not being punished. Automobile companies have been very open about raising prices from 1st January. Possibly, the same could have been done by electrical and electronic manufacturers, white goods manufacturers. If not, they would be going through margin pressure.
The market is possibly banking on demand and expects the price rise to be absorbed and there would not be too much of a margin pressure on the users of the commodities.
On Q3 FY21 numbers for BFSI sector
Several things will happen; one, although the moratorium was not extended after August, the Supreme Court judgement or the stay on classifying the asset quality as NPA and things like that still stands. So to that extent, it will be difficult to get the actual asset quality picture and within that, if we go by the RBI’s recent comments in its financial stability report and the comments by the Governor, there is a stress. One has to keep moving between these pointers and at the same time, the fact remains that growth has come back. The pre quarterly comments from some of the NBFCs and banks show a sequential growth, and in some cases, year-on-year growth as well.
In some cases, year-on-year growth is still not there because those managements have intentionally gone slow but clearly the sequential improvement is there. Quite a few strong banks and some of the NBFCs have been able to raise money largely through equity or debt and the return of growth brings in profitability. Increased business will be able to absorb any worsening asset quality pressure that could be there.
In the BFSI space, I continue to prefer insurance companies. These include both life as well as general insurance companies which have seen a very good price rise of late. The monthly numbers are also showing a good trend. Some of the larger private sector banks and within the NBFCs, the gold financing companies look good.
