Would you still focus on cyclicals, given the fact that we are seeing a big shift towards defensives?
We think that export-oriented companies will benefit more in the current scenario. In domestic cyclicals, metal companies which have a good exposure to both domestic markets and export markets – Tata Steel, SAIL, Hindalco, etc, – will benefit. The valuations of domestic cyclicals are still very attractive. Tata Steel’s debt reduction has been faster than expected, their top line growth was also faster than expected. Therefore, valuations will support further growth.
What is your take on expensive valuations in the FMCG basket?
Because of the second wave, there has been a marked slowdown in sales from last month. This time, not only big cities but also smaller cities have been impacted by the second COVID wave. As a result, sales will be quite muted or slightly less than expectations for the quarter. There is no scope for an upside given that these stocks are fairly richly valued. Given the uncertainty of earnings, they will probably tread water at current levels with no meaningful upsides from here.
Is there further headroom to buy pharma stocks afresh?
There are more than sufficient business catalysts to take this sector higher. Despite a rally, Granules still trades at about 11-12 times (PE multiples) of FY23. The company has restructured its operations. Its capex programme, which is largely complete, will add to its capacity. Its paracetamol sales will see an acceleration. Their ROE will expand.
Hospitals are also a very good space. Aster DM operates hospitals both in India as well as in the Middle East. They have an asset light model with about about 3,000 beds in India. They also have pharmacies and outpatient clinics in the Gulf region. This company trades at a very good valuation of about 8-9 times and with sufficient growth ahead.
And if you look at Dr Reddy’s, Remdesivir is good news for India and for the pharmaceutical sector. Glenmark’s Favipiravir, which is an anti-COVID drug for mild cases, will also see increased volumes. So all these business catalysts as well as attractive valuations will take this sector much higher for the rest of this year.
Is it time to cut exposure in auto stocks? Input prices have gone higher and the demand is going to be less.
It is a tale of two halves. Companies like Maruti are operating way below their capacity utilisation levels. And with no end in sight (to the trouble) in the medium term because of the next Covid wave, their factories are operating at lower capacities and factory workers are not coming back. On demand side, footfalls in showrooms have slowed down in the last one month. Unlike last year, rural India is also impacted by Covid. Therefore, two-wheeler sales, tractor sales are also getting impacted to an extent.
On the other hand, companies like Bajaj Auto, where more than 50% of their volume is exported, will do better than the domestic focussed ones. The only saving grace is valuations. Despite everything, Escorts is trading at about 12-13 times. But their upside is limited.
