Where do you see earnings comfort? More importantly, what are you pencilling in when it comes to the next quarter earnings?
We have not done numbers for the fourth quarter as yet but obviously it will be a very strong YoY growth because in the last 15 days of March 2020, sales were hurt because of Covid concerns followed by lockdown, Auto numbers were very depressed because anyway a transition from BS IV to BS VI was going on and so the wholesale volume numbers were trailing for both two-wheelers and four-wheelers.
Oil companies had a big inventory writeoff or loss in the fourth quarter last year because of a collapse in crude prices. The commodity prices were quite low compared to where they are. So anyway, on a year-on-year basis, the markets should not worry about the spending numbers. That is largely priced in now. The more important thing would be whether the FY22 numbers come through or not. As of now, it seems Q2 FY22 is looking at 30% growth. A fairly strong recovery is expected.
We have to see how the Covid situation evolves over the next one or two months. Hopefully, the situation is under control and the numbers come through otherwise we would expect some amount of headwind as far as the market is concerned. As the bond yields are headed higher, if we do not get the expected earnings growth, the market will start getting a bit worried and end up with some amount of rerating.
Where do you expect the valuations in the consumer staple space to settle?
There is a lot of value. Most of them are trading at 35 to 48-49 times March 2023 numbers. The only good thing is most of the stocks are trading at the same level where they were trading a year back. Look at the pre-Covid two-year forward valuations of the consumer staple companies. They are pretty much at the same level now. Sitting in March 2021, on a March 2023 basis, I see pretty much similar valuations. So, we have not seen any rerating as far as the multiples of the consumer staples is concerned. That gives us an opportunity in terms of a road forward to make about 10-15% returns over the next one year or so as the market was factoring in March 2023 or March 2024 numbers as the case may be.
If the Covid situation is to deteriorate, we could see some extra leg for the consumer staples, driven not so much by value but by the fact that it is treated as a classic defensive sector. Again the theme about pantry reloading and all the stuff could restart and we could see the food product companies starting to see some more interest on the back of worries about Covid coming back.
Honestly, it is not as if there is a lot of value in these names. It is not as if they have been derated. They are pretty much at similar levels compared to where they were a year back. Only with respect to the market, we would have seen some derating because many other sectors are seeing a rerating over the same 12 months, at the same two year forward PE or even PE EBITDA basis.We have seen rerating in the IT and pharma names to some extent.
There are two mega trends. One is the entire EV ecosystem and second is that how does one bet on the entire data migration theme which is getting played in banks or for that matter internet companies.How can one bet on these two themes?
In case of EVs, I do not know whether we will have any Indian companies to bet on. We have a few battery companies who are doing work for EVs. We are doing the IPO of one company. We have to see how this progresses because as of now, we do not have not much capabilities as far as battery technology is concerned.
Coming to the data migration theme, I really have no answers as most of the smarter companies will be able to use it a lot better compared to others. Banks and some of the e-commerce led companies will be having a lot of data and will accordingly use it to offer more targeted products with services to their clients.
Suddenly pharma has taken a back seat. Is this the market rotating or have pharma stocks run their course?
When everything came down, people started realising that things are not that bad. Consumer, pharma and IT companies were not that affected. If anything, there will be higher sales for some of the pharmaceutical and healthcare companies, especially the pathological labs. So we started seeing a quick rebound in those names and as the market got more confident about the overall Covid situation being not a very bad thing as far as the economy is concerned, most of the other sectors also started rallying after the initial rally in the consumer staples and pharmaceutical names in May or June of last year.
After that, more economically sensitive sectors started performing. So, we were seeing the usual rotation towards the end of last year, starting from October or early November. All the economy linked sectors like banks, NBFCs, real estate, metal mining, capital goods are the biggest performers.
I guess now everything is looking reasonably fairly valued. Over the next month, some corrections in the economically sensitive sectors could see some value coming back in those names. In pharmaceuticals, if one takes a slightly longer term call that is March 2023-March 2024, there is a case for earning visibility there.
They are quite okay. At the current levels they have seen some rerating in the multiples but not as much as the IT companies. Most of the pharmaceutical companies which were trading at about 14 to 17-18 times on a two-year forward basis about a year back, are now in the 17 to 21 times range.
