It is turning out to be quite an irritant the way the market on a daily basis has been reacting to each and every move on the US bond yields.
You are right that rising interest rates or the hardening interest rates in the US and in India has been a concern but that is bound to happen. We had a steep rise in the markets across-the-board over the last five-six months. Whenever this kind of rally happens, obviously markets are bound to get consolidated and the question most people would have in their minds is what from here? Are we going to see some sort of slow growth? Are we going to see some sort of impact on inflation? Commodity prices are going up and all those things are genuine concerns and that makes the market a bit consolidated.
Otherwise, one can always keep extrapolating and the market will be one way up. This kind of environment or news flow is good. I do not think this is something to structurally derail the economic recovery cycle that India is going through. India is going through a catalytic movement in terms of manufacturing, IT services growth and overall consumption profile and investment cycle. We have fairly large enablers of growth for the Indian economy and that makes it a very unique and interesting place to be.
If you are looking at markets from a three-to-five year perspective, you should look at this kind of consolidation phase to make investments. Having said that, one cannot wish this away. We have to be careful. One cannot just say that look at the long term and just ignore the short term. It is never the point. So you have to manage your risk. You have to take into account lots of factors which are developing. But currently, at this point in time, we are not overly concerned about some of the developments you mentioned.
The other debate in the market is that while growth has done well for the last five to seven years, it is value which is in demand right now. Do you think it is time for value to emerge a winner as opposed to growth stocks?
Every investor has his own style. There is a market cycle and there is rotation which keeps on happening. I have been a firm believer that in the Indian market, a large part of the money will be made out of growth. Only when earnings growth, cash flows are made, can sustainable value be created in the equity market.
Having said that, there will always be times like now when we saw a rally in PSU banks. Can one find a lot of value there? The answer is yes. But if you keep on chasing or keep on switching your style from growth to value, you will never be a successful investor. The idea is to stick to your core, do what you believe in and stick to that. There will be periods when you will not do well or some other style might do well and there will be periods when your style will do well. But that sustainable long-term wealth creation or above average wealth creation happens when you are looking at growth and investing. That does not mean that growth at any price is the best way to go. So have your own style. We firmly remain in our style of finding good companies with robust sustainable growth profiles, where the possibility of re-rating is also in the offing.
Where within the entire auto pack do you still find value? From last year March when the pandemic hit, recovery first was seen in ancillaries and that is largely the battery makers. Then it trickled to rural plays with tractor sales holding up and now it has spread across passenger vehicles as well as CVs.
The way we think about it when there was deep value, the correction in the cycle happened. So to some extent we believe that a large part of the auto story — from a deep value perspective — has played out. Currently, we find three problems with the whole auto space. One, we think that competitive intensity across segments is going up while the demand environment can be robust in a shorter to medium term, but competitive intensity is going up.
Secondly, commodity prices are going up and passing it on becomes slightly harder with high competitive intensity. So the margins may be squeezed.
Thirdly, most auto companies are facing transition or disruption in the form of Electric Vehicles (EV). We do not know who will be the winner yet. In a situation like this, we will avoid the auto sector per se. India is a diverse story right now. There are many other opportunities without possibility of a disruption risk. In fact, even in auto components, the risk reward is better than auto companies because of sheer competitive intensity at the marketplace. We feel that probably your risk reward of investing is better elsewhere than in automobiles. Having said that, there are always players like Eicher who are not facing any of these things which we mentioned and hence probably could be and would be better off. But otherwise, we are not as positive or as bullish on auto sector in general.
