Is the selling in the Bank Nifty today par for course or slightly exaggerated?
We have to look at other factors for which the effect can be seen in the market. The banks are reacting not only to the lockdown and the effect on Maharashtra state alone, they are probably reacting to the upcoming monetary policy and the monetary policy statement of the RBI. We know the inflation is becoming a little uncomfortably high. That means it is on the upper band and within the RBI target, but on the upper band of the target. The core inflation remains stubbornly high. So the bond markets are probably trying to factor in a rise in inflation and potentially therefore rise in interest rates going ahead if not now in the current monetary policy, That is probably affecting the banks. That’s what I mean when I said it is not the lockdown effect alone, it is probably the MPC (Monetary Policy Committee) effect that we are seeing in the bank stocks today.
The RBI Governor said at our IEC event last week that he is not going to lower the growth projections even though the second wave is at play. He clearly said that the growth forecasting will not change.
Yes I do accept that and I am not saying that the RBI has been not communicating enough. They are indeed communicating quite well to the market but the market has its own logic. When there is a situation where inflation is remaining stubbornly high, some part of that inflation is coming because of high commodity prices. Compared to the previous year, economic activity is becoming a little more rapid. The pace of growth is appreciably high and it brings its own inflationary dynamics into the market. Therefore the markets are trying to figure out whether banks will get affected by rising bond yields, rising inflation and therefore rising bond yields.
Structurally we do not know where the interest curve will slope. So today’s effect on the banks perhaps has got to do with that bond yield effect. I am sure once the MPC meeting is over and we hear from the RBI, the frayed nerves will settle down.
The second wave means more compulsory testing and more work for diagnostic companies. Is the fact that Thyrocare, Dr Lal and even Metropolis have run up in the last couple of days, more like a trade?
Yes, you are right. That effect is being observed. We have observed this effect in the past as well when testing goes up, some of these diagnostic companies do tend to go up. But remember, we also have a situation where the test costs are rapidly falling and the pricing therefore is also being controlled downwards. One needs to see whether this whole testing uptick in terms of volumes for the diagnostic companies is remunerative
I have said in the past that between the testing effect which gives a positive earnings momentum to the diagnostic companies versus the downwards revision that you see when a lockdown happens as the traditional testing for comorbidities tends to go down. So for diagnostic companies it is a balance of both. I believe that while there is a small near term trade, I am not buying into this theory that diagnostic companies will churn out better numbers going forward on a sustainable basis.
What you are doing with these multiplex players and hospitality names?
In hospitality as well as multiplex companies, we typically tend to advise our investors to stay low with very limited allocation. On the multiplexes side, we would have typically recommended zero allocation. We do know that any form of lockdown — whether it is a mini lockdown or it is a weekend lockdown or a 50% lockdown — affects the businesses of multiplexes and they are left with not a continuous stream of revenues. Not only that, multiplexes are dependent initially on flow of content and flow of newer and newer films for exhibition. So even that flow is getting either arrested or halted.
In such a situation, it is very difficult for multiplexes to deliver sustainable profits going forward. Cost control is the only way forward for them and they will have to conserve their capital. As far as the hospitality sector is concerned, there are only a few players to choose from in the wider market and therefore our standard advice to most investors is to stay low on this sector. There is no need to be over allocated. Lockdowns will necessarily mean a disruption in the businesses of this kind affecting regular cash flows as well as profitability. We would avoid these stocks.
