On where to look for opportunities in IT pack
The technological transformation is creating opportunities across the board. Most of the listed companies are in a positive state but bigger action is happening in the unlisted space. Huge investments are happening in unlisted Indian IT companies and some are becoming unicorns. Most of the investors unfortunately cannot participate in that space and that is where the real moves in terms of newer technologies like SAAS or cloud computing or gaming is happening.
Among the larger companies, some of the arguments about steady growth are very true but we need to realise that all the upgradation cycles will ultimately lead to 10-11-12% growth in these companies with possibly no real margin levers being left. So, if the stock runs up 40-50% for a 10-12% growing company, what is the price earning ratio you are willing to give? In uncertain times, they will outperform but in terms of absolute return, most of the IT companies are now trading at valuations where it is tough to get very high absolute returns from any of them over the next one year.
On commodity crash
At this stage, it is not a crash. I would say it is just a correction and to that extent that corrective move is getting reflected in most of the metal stocks. On the trading side, from the traders’ and short-term investors’ perspective, it is a deferred port of call and to that extent, everyone loaded on to these stocks and as the negative news flow comes through, leverage selling is also greater in these companies.
I would think that commodity correction still has some way to go because you cannot have 100% moves in commodities and assume that there is going to be no impact on demand. Obviously, there will be some impact on demand. When prices are going up continuously, restocking happens. Many of the consuming companies are holding more stocks than what they usually would. So when the reversal happens, the stock build up reduces and possibly destocking takes place.
This leads to corrective moves and that combined with the US dollar move which has happened. I would think that the US dollar still has some way to go in terms of appreciation and that combined with concerns among many governments and especially China that inflation cannot be allowed to go out of control — could lead to some more correction. There is a view that this is a commodity super cycle. I am not so sure about that because the commodity super cycle requires sustained high global growth over a period of time.
Given the leverage which most of the western economies and developed economies have built up during Covid times, I am not very sure whether those economies will grow as aggressively as people are expecting them to. So, there will be a corrective move. There will be a bounce back and right now the probability of more correction is greater.
Is Reliance a buy ahead of the AGM on 24 I June?
Reliance moves on announcements. We need to look at actual delivery and to that extent, whatever they have done on the Jio platform has been a disappointment for the investors who have come in. The current valuations factor in a lot of earnings acceleration going forward. I really do not see too much value in Reliance except for the fact that it has underperformed the index significantly after the first move post all the investments coming into its subsidiaries. As it continues to underperform most of the other large cap stocks significantly, I would think there is little upside right now unless there is a paradigm change in growth which is reflected in Jio platforms or some of their new ventures. which I do not really see happening.
Where do you stand on Avenue Supermarts as well as InfoEdge? Do they make a strong case for Nifty constituents?
There is no clear case for Avenue to come in except for the fact that it is a fancied stock. It has got market capitalisation but it does not have turnover and the kind of profits which ideally should be required for a stock to be included. InfoEdge is more new generation and it will be good if some companies like that come into the index.
But we need to realise that index changes happen too frequently in India and companies with a very small trading history are brought in — which ideally should not be done in the Sensex and Nifty. Companies should have to display a long period of established, listed track record before they come into the large cap index. Obviously they can come into the next level indices but not the main indices.
Is the unlock trade over now?
I personally would not think so because most of the investors do not believe in that trade even now. What we have seen is that the same set of stocks has been bought more even during the last few weeks rather than the companies which could actually be beneficiaries of unlock. Some moves have happened but when the real unlock happens, at that time many of the leaders in the unlock space — in leisure, hospitality, multiplex, airlines — will see a paradigm shift in their business.
If pent up demand can come up in many of the other industries, then when the actual unlock happens, why will pent up demand not show up in these segments? It has been seen in the US also. In the US, in last one or two weeks we have seen a slowdown in goods demand and interaction with people has shown that they are saving and are actually looking to spend more on travel and entertainment.
