SBI is outperforming HDFC Bank. Power stocks are making a comeback. So this market is changing colours very fast. Any thoughts on this?
Basically, there is a sense of relief that the second wave is behind us. As vaccination drive begins properly, we would hopefully be out of Covid. Even if there is a third wave, the hope is that it will be a small one. And under such circumstances, people say why should I buy the optically expensive HDFC Bank and not SBI. Such trades are inevitable.
But my experience has shown me these are passing waves. Fundamentally, over the course of a stock market cycle you go through bull and bear market phases. An HDFC Bank has too much muscle than an SBI to be able to keep up with it.
It is a good thing that the risk appetite and confidence is coming back into the market.
Given that how the shape of the economy is changing, have you identified a champion from the mid or smallcap space?
A lot of themes that we have been playing over the last two-and-a-half years will continue to work. What we are trying to do is understand how the human psychology is changing. There are changes in consumption of speciality chemicals. People need more cleaning products and personal care products. People are doing more medical tests and not just for Covid. We have franchises like Dr Lal Path Labs.
I recommend cleaning and personal care front. The behaviour is changing steeply. Over the past year or so, we have built a substantial position in Galaxy Surfactants. This is the largest manufacturer of surfactants in the country and supplies to companies like Unilever. It also has a large business which supplies chemicals which go into personal care products like lotions and skin care and so on. Whether you buy cleaning products and personal care products through Unilever or P&G, ultimately the raw material is coming from Galaxy Surfactants. So we felt it was the neatest way to play this significant lasting upsurge in consumer behaviour where they buy more cleaning and personal care products.
Galaxy also has a substantial export franchise. PAT has been compounding at around 20-22 per cent for the last five years. They have a dominant franchise, strong balance sheet, clean management team and strong R&D capability. That’s what really drew us to this franchise. Surfactants are a commodity but this company seems to make a better quality of surfactants and that too with oleochemicals rather than petrochemicals. It stands out from the crowd. So one simple way to profit in the post-Covid world would be to look at Galaxy Surfactants.
What are your expectations in terms of the recovery in cyclicals and consumption?
Globally, you have a very strong cyclical recovery. The global commodity demand is probably the strongest in eight-nine years. It look that the demand is outstripping supply by a considerable amount. As we saw in the fourth quarter, in India too we will continue seeing capex recovery. The fourth quarter GDP data clearly points to a capex recovery. In April-May this year, you had some of the largest steel companies announcing capex. So the capex cycle is underway. There is a whole wave of market activity where people will rush to play the capex cycle.
Fundamentally, a bull market and commodities mean input cost pressure. It leads to inflation and therefore one needs to invest in strong franchises which have pricing power to deal with inflation and protect their operating margins. Across the world, it looks inevitable that commodity prices and inflation will go up strongly. Therefore, our focus as ever is to invest in powerhouse franchises which have the pricing power to make sure that the topline growth comes through the bottomline. That has been our focus for a long time.
