How do you think the second wave of Covid can impact financial stocks?
Undoubtedly, there are certain pockets in financial services like microfinance, commercial vehicle financing, unsecured personal loans, etc, which will get impacted far more adversely because of the second wave. One interesting observation from the last nine months is that banks have started providing for Covid-related costs in provisions. This has ensured that there is a reasonable built up of provisions in their balance sheets. So the balance sheets will be relatively better in terms of secured loans, auto loans, housing loans and large company loans.
Do you see more room for growth in IT and pharma?
If Covid continues to affect economic activities then defensive sectors like IT, pharma and FMCG will do well. So there could be a rerating if uncertainty increases. On the other hand if economic activities become normal, then cyclicals like metals and cement will do well when compared with defensives. So this is a top-down approach.
Covid has made the market for IT companies bigger due to the digital push. Many of our IT companies had made investments into futuristic businesses like cloud, data centre, artificial intelligence, machine learning, etc. Today they are able to service clients all over the world. All this has created higher growth visibility for Indian IT companies and their valuations remain favourable. Governance standards are also superior in IT companies as compared with other industries. Considering all these aspects together, IT should be able to outperform pharma and FMCG companies.
Auto stocks have been an underperformer for most part of FY21. Can this pocket emerge stronger?
There are plenty of problems for auto companies. At first, they faced chip shortages, then metals prices went up and now finally demand is also getting impacted. In all likelihood, the auto sector is probably going to see input pressure and lowering of demand because of rising prices.
Some auto companies have hiked prices but that is probably going to impact demand. Auto companies will face a challenging time ahead. However, in terms of prices, a lot of bad news is already discounted. If demand picks up, operating leverage will kick in for auto companies.
One can look at two-wheelers, entry level car segments and auto component companies which are applying for production linked incentives (PLI) schemes and trying to join the global supply chain. Sectors like commercial vehicles and high-end motor vehicles are to be avoided. One has to be very selective in the auto sector.
How you are looking at the aviation space?
In early parts of my career I believed what one global investor said: If someone had shot down Wright Brothers and the aeroplane was not invented, the career of many fund managers would have been saved!
That was true for aviation sector as it failed to create value for shareholders. The times have changed now. The same investors are now invested in aviation. We have also changed our view.
In aviation, there is an oligopoly kind of structure with one very large dominant player, a very efficient player and then there are other small players. The sector is going through a very tough time right now. The traffic has dropped down because of lockdowns and aviation companies are struggling to make a profit.
However, if you see on a longer term basis this oligopoly kind of situation will become even more tougher and the leader will have a disproportionate market share. So you have to take a call on how much short-term losses the leader can suffer vis-à-vis the creation of the long-term potential. So if I have to invest in aviation, I will be looking only at the leaders. You will have to very careful while investing in other players.
