On the recent consolidation in the market
We have had a phenomenal rally in the markets over the last one year. The index has almost doubled from the lows of last March. Obviously, after such a phenomenal rally, it is very fair for the market just to pause to catch a breath. Obviously there will be a round of profit taking which investors might want to invest in.
There are certain clouds in terms of rising crude oil prices and some concerns on rising rates in the US but I do not think that any of those has a significant influence on India’s long-term growth story. Markets might pause to catch their breath and we might be in for a consolidation or a minor pullback. But beyond that, the bull market remains pretty much alive.
On whether banking sector will be one of the best ways to play this recovery
I think so because due to the inherent nature of the business, banks always leverage and this time around, the good thing is that the banks are getting into this new economic cycle with very clean balance sheets. Pre-Covid, in the last few years, there was this hangover of big NPAs which banks were busy cleaning. Covid came at the end of the NPA cycle for India. As we enter the new economic cycle — both corporate and retail lenders — will have a relatively clean balance sheet and a lot of these banks have raised capital last year. They are very well capitalised and they have all the ammunition to support the growth in the economy. Given the inherent nature of the business, they are pretty leveraged and that effectively means their earnings growth in a good economic cycle is significantly higher.
Are large PSU banks one way to play this recovery?
Yes, it is, but PSU banks have an element of valuation rerating because of the divestment that the government announced in this Budget. All of us know that in the last seven-eight years, we were seeing PSU banks being beaten down badly and their valuations have eroded very significantly. A significant value erosion has happened across the spectrum, across all PSUs and also in banking.
If the government goes ahead and sells a few of these, then the valuation which these banks will command will be much higher than what the markets are awarding them. We are seeing a rub off effect of that on all PSU banks.
Is value investing back in the market?
I would think so. Since 2009, over the last 12 years, we have seen the biggest underperformance of value in 150 years of investing. In the last 12 years, growth was scarce and the scarcity premium of growth stocks just exploded. Now that globally growth is getting much more broad-based because of fiscal stimulus and economies across the world are bouncing back sharply, the scarcity premium given to growth will come down. This effectively means we will see a mean reversion in terms of valuations where some of the domestic economy oriented sectors which have been trading significantly below the index valuations, will catch up.
At the same time, some of the high growth companies will continue to remain phenomenal businesses from a longer term perspective but their valuation premiums will moderate significantly.
How should one look at some of these hard core manufacturing companies?
We have seen a sharp rebound in commodity prices across the board. The prices of steel or any of the other global commodities including copper, oil are significantly higher over the last six-nine months. It is pretty interesting because in a lot of these commodities, we have not seen any significant investments in capacity creation over the last 10 years. Just to give an anecdote, today the global copper production capacity is the same as it was 10 years back in 2010 and obviously over the last 10 years, copper consumption has gone higher which effectively means the supply demand gap between these commodities has reduced significantly.
Everybody is expecting a meaningful resurgence or recovery in demand in commodities. Commodity prices are headed much higher than where we are because as all of us know, in commodities, it takes at least four-five years to create new capacity which effectively means that pricing power which was elusive for commodity producers probably could come back and that will have a very significant delta on their revenue and profits.
