Seems like we are going to get a Monday like jhatka (jerk) once again today?
Over every weekend, people are trying to reanalyse the Covid spread and the growing lockdowns. Some lockdowns are there till the beginning of May, some are till mid of May. It creates a significant economic uncertainty at a time when earnings growth estimates are extremely elevated. Analysts are still not willing to cut down the earnings growth estimate of 32% to 35% for this year and that is the biggest challenge for the markets.
Recovery will happen eventually but the earnings growth estimates will have to be adjusted and that is the biggest factor. Secondly, you know the possibility of an extremely uneven growth globally is growing very significantly. On one hand, we will have countries which have the virus really under control — countries like Israel, the UK, Hong Kong, China and the US. It seems to be well under control in these countries and the US is the most important market. So very strong economic revival is likely in these countries and possibly even the Eurozone as vaccination picks up.
India unfortunately is not so well placed because a) of the Covid wave; and b)the vaccination programme is stuck at a particular level and unlikely to move up significantly from where it is. On top of that, there is a significant inflationary build up.
These are the things which investors need to ponder about and the markets need to adjust to. From being a very preferred market for foreign investors, we might end up not really preferred in the near term at least as other markets show better earnings growth prospects. Some markets will grow and revive faster than what was expected earlier and India might revive slower than expected. That is why it makes sense to be a bit cautious and then eventually settle down. Over the next one month-month and a half we will have a better market level.
40% of the earnings of the index are largely global in nature if commodities are added. That end of the market is still intact — be it JLR effect on or digitisation effect on IT or a demand impact on pharma or perhaps high commodity price impact on Tata Steel and . So some would argue that let us look at that market.
Yes that is true but if you look at it in entirety, the expectations for earnings growth for this year was 35% on an average. Let us assume that these companies which you talked of do extraordinarily well, but even then they will not be able to compensate for earnings losses in the other sectors like consumer goods.
The other part is that as far as the export-focused companies go like the IT companies, the growth outlook is good. At the most aggressive, these companies like Infosys — if we take the most aggressive guidance — will grow at 14% with the margin squeeze of around 1% vis-à-vis last year. That leads to earnings growth of maybe 9-10% for Infosys. These companies will be growing their earnings between 8% to 12% and not more than that.
Commodity industries will show very strong earnings growth but they are a very small part of the indices and the overall market and some of the pharma companies could do reasonably well this year. JLR is an overseas story, Their markets are reviving and Tata Motors should outperform the rest of the auto basket.
But then the market was not ready for the potential earnings downgrade due to the second wave. I have seen a lot of analysts are very hunky-dory on HDFC Bank results. But the one thing that struck me was that they have decided not to pay out a dividend even when RBI has no restriction on dividend payouts for this year.
As a conservative bank if they are taking this stance, then they might be seeing more stress than what many of the analysts are seeing at this stage. That is the perspective with which people should look at markets. It does not pay to be aggressively bullish all a time when it is clearly not the time to be so aggressively bullish.
Cadila has a lot of things going for them. A) They are making Remdesivir. B) They could be the third Indian company who could come out with a vaccine variant; and C) They have already gone on record and have said that look we are developing a vaccine for children and hopefully some trial evidence would be there in June end or July end. Do you think the terminal value of Cadila could change from being a generic manufacturer to a vaccine manufacturer?
I agree they have been doing something which are very different and they have been investing unlike most of the other Indian pharma companies. They are trying to tie up with global manufacturers and not doing anything on their own. These are pure pharma companies. I am not talking of the vaccine companies which have developed the vaccines.
So now there is an option value on Cadila. Even if one or two of the things they are doing becomes successful, then the stock valuations could move up substantially. So I would agree that Cadila is in a good space. It is not an over owned stock also. It has not talked so much like many of the other speculative pharma companies and I would think that this stock has the potential of delivering even if any one of their initiatives become successful. That is the only risk we are taking.
How there is a renewed shift towards pharma once again, do you believe there are opportunities to buy afresh within pharma?
Most of the larger companies look pretty well placed. We talked about Cadila.
is something that we have been buying and that looks good for me both in terms of valuation and growth paradigm. Dr Reddy’s is a good story but we need to look for corrections to buy now because it has gone up 20% very fast.
So I think we need to look at opportunities out there. But overall the possibility that pharma could outperform the market is very high. It had become an under-owned sector over the last nine to 12 months and I think now it is coming back and it should continue.
Do you buy this argument that one should ot buy consumer stocks? They did well during the first lockdown. Right now, these companies are struggling with input pressures.
The input cost pressures are real for many of these companies but there has to be a distinction between them.
would still see earnings. There is a significant pickup in packaged products but we need to realise that their base for Q1 of last year (April to June) is so high that it would be impossible for them to clear growth over the last quarter. These are the concerns which need to be taken into account.
Some of the companies like Dabur actually might do well because of their health portfolio. They are seeing very strong demand and to that extent, it is not a stock which has run up so much and could continue to outperform. Many of the paint companies started to do very well last year.
The difference between last year and this year is that last year, the fear was more, the number of cases were less and this time, the number of cases actually are very high and when that happens, then people become very cautious and so some of these companies like paints which did very well last year, might not do as well. We need to be very selective on the consumer side and the input cost pressure is very real.
