On the outlook for IT stocks
In IT, the demand is not coming from India but overseas, so the question is whether we have the ability to service it. There is no doubt that the fact that a large number of people are not well and may not be able to react to requirements could be a near term dampener. Over a longer period or even in the medium-term, you will find it difficult to service any requirement that comes from the overseas market. Anyways for the most part of the last year, IT companies have learnt how to work from home.
So the only issue is the stiff valuation which is factoring in most of the upside that you could possibly get. The long term problem is whether IT services, the way we know it, is going to survive or not. That said, most of the companies have reported good numbers and have said that they are seeing good traction in their businesses.
What is your sense when it comes to the entire metal basket and the trajectory that we could see in global commodity prices?
I think it is not just the metals, it is a general inflationary trend that you are going to see across the board. So if you ask me whether commodity prices are headed up higher from here, I think the answer is an unequivocally yes. Are you going to make a lot more money from the markets going forward? I think markets are generally now positioned where most people have managed to increase the allocation to metals and to other commodities and therefore you are perhaps in the second half of the up move. You may still have some upside left, but overall you are now reaching levels where the market is pricing in more or less everything.
What they are not pricing in is the fact that there is going to be a demand slowdown for many of these commodities within the next two quarters if the price trajectory that we are forecasting comes through. You cannot have a situation where the price continues to rise exponentially without impacting demand adversely. You are going to see some of that push back happening in the next two quarters. From a timing perspective, the game is not done yet. I would think you will probably get another couple of quarters of upwards movement and another four quarters of earnings growth. From a portfolio perspective, if you are buying now, make sure that you buy the dip and keep an eye on the door. You will have to find ways to get out of it in the next two quarters.
How closely you are monitoring agri commodities?
Sugar has now suddenly become, as far as the market is concerned, more of an ethanol play than a sugar play. The argument that is being made is that ethanol was anyways contributing a significant chunk of profits that you would have at an operating level from a sugar mill.
If you focus on the fact that the ethanol mix is actually going to go up as a percentage, margins become fairly stable and predictable. More importantly, sugar mills can now operate round-the-year. So there may be a case for re-rating by looking at factories that produces ethanol with sugar as a byproduct.
Producing sugar is a disaster for this country, especially when you are exporting it because it is a very high guzzler of water. To generate sugar and then to sell it outside is like exporting water which is a criminal waste of money. But that said, it is also a very large employer of people and therefore much of agriculture depends on it. To the extent that it will become an ethanol play, it can become a little more stable and therefore you should not really just look at the sugar cycle itself. For the near term, there may be a little more upside from here.
