Do you see further conviction building in some of the IT names?
IT will become a good defensive bet as the correction plays out. The way the guidance has come from Accenture, what other companies have been saying and also the US Fed forecast on the US GDP — all that indicate that demand conditions remain strong. The things we need to consider is that the rupee has been very strong against the dollar and some margin adjustment might happen. Many of the companies have hiked salaries, the impact of which could be seen in the margin. On balance, the story is not bad but we need to consider that these are broadly 5-7% growth companies. It would be 8-9% in a good year and 5% in a bad year. We need to value them accordingly.
Giving a high price earnings ratio is not a valid argument for the Indian IT companies contrary to many of the high growth companies listed on the Nasdaq in the US. I guess the IT stocks will also correct but as the correction plays out, on the bounce back, this could be a sector which could lead and that is the time we look to add positions in IT stocks.
Amazon has fallen and we tend to think TCS will fall because there is a problem in the stock price of Tesla and that could have an impact on the TCS stock price. They are not related but the price action is telling us a different story?
That is true. All the technology companies are part of large technology indices globally and they are part of large technology global funds. So there are times when there are outflows from these funds. When bigger selling comes in the larger companies like Tesla, Amazon, Microsoft or Netflix, then Indian IT companies also get a fair share of their selling. There are a lot of index funds etc. which backed that and to that extent they tend to be correlated but their businesses are not correlated and the valuations are way too high. I don’t know whether Tesla would trade at 300 odd times next year.
Indian IT companies are very reasonably valued in terms of their cash flows and profitability but are slightly expensive in terms of growth. So when Accenture gives good guidance, these IT stocks should react positively. They might start positive but they will still sell off in my view till the overall corrective moves goes off. Those could be fair levels for investors to get in aiming at a 20-25% return.
The logic is value is outperforming, stay with cyclicals as the Indian economy will do well. Would you still buy stocks like L&T, SBI, ICICI Bank on declines?
I would not buy SBI. It is an overhyped stock. After the last result, the management came out and said the worst is over and somehow a lot of the brokerages jumped on it and geared for some crazy target prices. I would still think that there is a lot of stress on SBI’s balance sheet and there is going to be a second round of lockdowns. They have been so aggressively lending on the retail side they could have some issues out there.
L&T will be one of the favourite stocks because they have grown order books humongously and are the beneficiaries of a commodity uptick and as well as infrastructure investments. They have been managing their cash flows and balance sheet well. It would remain a preferred bet. ICICI Bank should do well and should be bought on corrections but given that ICICI also got a fair share of tension, we could see it participate decently in the corrective move. As the correction plays out, it would be a preferred bet in the banking side.
Indian bond yields have not gone up that much higher but what happens to the PE multiples of Asian Paints, Jubilant Food Works, Bosch and Page Industries? Will they also start contracting?
Valuation contraction will happen and it will happen more so in the new generation IT/IT enabling companies like Affle, IndiaMart. This category of stocks will see a greater fall in their PE ratios. Some of the other growth stocks will also see a contraction, but that might not be as great. But in today’s market, people do not understand the impact of the change of interest rates. One is the valuation part. When 0.5 goes to 1.75, the valuations need to adjust globally. The second part which Indian investors, retail investors need to understand is there is a huge amount of leverage globally. When you are leveraging 20-30 times, if you interest rate goes up from 0.5% to 2%, the impact is very severe. It is especially so if that gets accompanied by a corrective move.
So on a leverage basis, you are losing money like you do in futures and options where you get a typical leverage of just five times. Globally 20-30 times leverage is also possible for many hedge funds and many high net worth individuals. That is a bigger risk. If the correction plays out more that leverage unwinding itself could contribute much bigger to the correction. We need to be cognisant of this.
