Ajay Srivastava, CEO,
Dimensions Corporate Finance.
The news on the medical front is not great. Do you expect markets to repeat what happened last year or could this time the reaction would be more mature?
What you did in March last year decided whether you made a fortune or lost one. I think investors are cautious about committing fresh capital. Coming to the health crisis, people have been very stupid in terms of not sticking to the norms but look at the election rallies! During Maha Kumbh, I was there in Uttarakhand. It was an absolute disaster waiting to happen! So caution is warranted and more than selling, we are seeing caution on committing fresh capital. Also the core industries’ numbers were very sobering. They were much below our expectations and came in negative. At the end of the day, the government is taxing you much more and giving you a lot less in return. Therefore, net-net, the wealth of a large part of the citizens of this country is going to erode. The top 5% or 2% or one whatever you call them are going to make money no matter which way the market works. But for the bottom 75%-80%, there is a problem in the wealth and spending patterns.
So should investors sit tight and not commit any fresh capital or use the dry powder if there is a 2-5% decline on the Nifty and 6-7% on the Bank Nifty?
Well dry powder has to be used. But the first place you have to use it in is metals. Metal is like gold today. At the end of the day, there is severe concentration of capacity and that is true for most parts of our economy. Companies are making bumper profits because they are almost becoming monopolies. Two to four companies control 80% of the market share. It does not matter where the economy goes, they will make money.
So if you want to reallocate, the right way is to keep adding up to metals on every correction. Metal is the place to be because that has got a long runway. They are going to see good times for five-six years. This is the place where you want to be.
Number two is companies with specific stories, the IEX kind of stories. The gas exchange is going to be the second largest in the world. I would say that rather than committing to Nifty and Bank Nifty, this is the time to commit on correction in companies with deep modes because they will give you superior returns. Nifty, even from a 20-30 years’ perspective, has not given very attractive return points to points or various points, if you ignore last March to this March. Investing in companies on the other hand, paid handsome returns. That is where one should commit more capital because this is a place where you will make maximum returns at every correction that gets you the opportunity.
Do you see much of an impact on consumption this time given the re-imposing of restrictions, possibly a hit on sentiment, do you see any impact there?
Of course, it is going to impact. Of course, it has to impact but the bottom line is that that impact does not really translate up to the stock market to that extent for the simple reason that there are lots of companies which cater to the unorganised sector. These could be consumer products, clothing manufacturers, which do not really add up too much and what adds up is, of course, the PV manufacturers. They will see less slow down in terms of traffic but that will pass through over time.
So yes, consumption will slow down at the economy level but do you see that slowing down for the stock market participants? I doubt very much that it is going to happen. So will that impact a Dabur? Perhaps marginally so but Dabur is also going deep into the global market. Will that impact Emami? Maybe marginally so. But these companies have deep moats and these minor demand slowdowns only help them further because they have the sheer power to command retail presence and push out the marginal players from the market. So the more the slowdown happens, the stronger these companies get.
Therefore a stock market should be cognisant of the fact that monopolies are being created in an impact market and they will make superior returns whichever way the economy works. It is shown to us in the last five years that as the economy has struggled for 5-6% growth, these companies have given handsome returns of 20% and above. That is the power of monopoly at this point of time. Consumption slowdown will impact these companies by making them stronger.
Would you stick to the safer names, a handful of index stocks or would you wait and watch how things evolve?
There is no point waiting and watching. You could not predict in February that Covid second wave will be so big. People need to be very clear about their shopping list. Is it a new economy stock? Which are the strongest players? Are they monopolies in their portfolios? Let’s take Adani Port. I am not recommending it though I have a holding. What can happen to the company? It controls 70-80% of the port traffic in this country. If port traffic goes down, it will have a marginal impact on it. But port traffic will go up eventually and it will be a great positive multiplier.
So when you evaluate whether you have a port company, whether you have an IEX equivalent in your portfolios, you really do not look at the current and say what is going to happen in the next one month or two months or three months. Do have those monopolies in your portfolio because if you do not have and you are running after the same cement companies and the same old economy companies, you will have a problem in a portfolio at the end of the day. It is not about timing.
So one has to build a portfolio with the right companies. That’s the way I would look at it and yes we will have ups and downs in the market and that is very visible in the market today. There is a lot of weakness but use that to your advantage because in the next three to five years, the larger companies of this economy are going to make supernormal returns. That is the moral of the story. Economy notwithstanding, they will make supernormal returns. You saw what happened to steel company fortunes. A change in tariff changed their fortunes. So bet on the bigger companies they will be the beneficiaries no matter which way the economy goes.
