Is all the damage from the second wave priced in or would you say that the market, perhaps on account of weaker legs, have some more downside left to go?
Given the fact that the second leg of Covid has hit everyone very suddenly and with great force, it is impossible for the entire impact of that to be fully built into the markets right now. There will definitely be an impact on banks. This time the same MO of the RBI reducing interest rates drastically and putting in liquidity is not there. Last time, the fear was more than the disease. There was a fear about the unknown disease but the actual infestation in India was much lower and even the impact on people was relatively muted except for the hospitality and travel sectors where there was a drastic impact. This time, however, the impact is real and drastic.
I would think that it is too early to declare that the worst has been built into the markets. The financials still face risk and that was reflected in what
did when they did not declare a dividend. So the prudent banks see some stress. Those living in fool’s paradise can think that there will be no impact. I will be very happy if there is no impact but I would not bet on it.
Why the weakness in cement all of a sudden?
After the ACC results came out, the weakness in cement started. It has more to do with the fact that now there is a belief that although the volume growth picture looks good longer term, in the near term there will be an impact and the cost push inflation right now seems to be significant.
So the margin expansion story seems to be over for now and to that extent, it is getting factored in. In fact, cement is a good story but the valuations had run way ahead of the fundamentals and to that extent, a good corrective move is playing out. UltraTech is down around 15% from the top. If it corrects by another 100 odd percent, then it could become a good opportunity.
Do you believe that we are likely to see some sort of a reprieve in the quarterly earnings and perhaps the impact of the second wave is likely to play out in the next quarter? Which are the sectors where we could see some sort of an upside?
This result season was supposed to set the tone for next year and give a direction to the markets, but unfortunately the second wave of Covid has hit in such a manner and at such a time, that the reported earnings of companies have become less relevant now. More relevant is the outlook and how things are going to play out.
All of us know that the risk to economic growth is there both in terms of the hot performing sectors like consumer durables and the auto sector. Banking sector commentary will be interesting to monitor but banks did not see that stress in the March end quarter. They will start seeing the stress going forward because of the second Covid wave peaking and the big move has been over the last one month itself. So to that extent, outlook becomes much more important than the results.
We have seen that recovery prospects are better in technology companies, which are not linked to the domestic economy and are more linked to the global economy. I would be keen to see the commentary of capital goods infrastructure companies because there was a lot of momentum there. So on consumption, we will definitely see a hit. But it remains to be seen whether on the execution of projects, etc, we will see some hit. If the commentary from those companies was okay, then given the correction, some of the stocks like L&T and some other infra capital good companies could become interesting.
How are you looking at some of the businesses or sectors that have been badly hit by the lockdown? It would be the consumption space in terms of hotels, hospitality, tourism, aviation and multiplexes. Can you buy them on declines or should they be avoided for now?
They are under deep stress right now but many of the high quality companies are also coming into deep value zones in these sectors. These will be the sectors which will finally bounce back. The recovery in India has got delayed by a few months. It is happening in other parts of the world and will happen much faster in other parts of the world so some of these stocks are down 30-40% from their tops whereas the markets or many of the other midcaps are not, which are seemingly not impacted by whatever is happening on the Covid front. So I would agree that high quality hotel companies, maybe the market leader in aviation, the multiplex stocks, the luggage companies so all of them will present a very good opportunity for buying whether it is now or whether it will be a month from now it is very tough to say in terms of price movement but I would think that investors who start accumulating them, spread it over a period of let us say four to six weeks will get a good entry point and a year from now these stocks should be much higher.
Does the preferred list remain the same over there; Inox, and IHCL?
Yes. I think Indian Hotels is a great company and the cheaper we get it, the better it is. It is a good stock to accumulate. In terms of valuations, PVR has fallen more than Inox and both of them have come to similar valuations.People who want to be with the market leader can prefer that. Other people can prefer Inox.
In terms of aviation I have not really taken a bet but given the travails of the competitors like SpiceJet with layoffs and their inability to pay some of the lease instalments etc, InterGlobe Aviation (IndiGo) appears stronger, So, in a revival cycle, they will do very well. But again, it is a question of spreading out and buying because we do not really know when this entire wave is going to end. People who spread out and buy, can get to an average level and over the next one to two years, it should do very well.
Should one get a little cautious on metals? Or are the valuations in the metal space still way off from the long-term averages?
I think valuations have become a bit expensive right now and they are factoring in continued price hikes going forward which might not happen. People need to understand that commodity stocks are very highly leveraged to the underlying commodity price movement. If the underlying commodity moves up by 5%, typically these stocks will move up by 10-15% and the same is true on the inverse side also. So they have had a huge run up.
If you look at the charts of these stocks, it is virtually a straight line up and typically such moves have sharp corrective phases also. We will get sharp corrective phases where many of these stocks could be available 15-20% or even more lower and that would be a time for buying because the cycle seems to be longer this time.
