How are you reading into the overall market momentum given that we are seeing a meltdown within the entire metals basket, PSUs in particular while FMCG and pharma are bucking the general trend?
Today’s reaction is largely because of the Fed action which was indicating that rates will rise in future. If you think of it, it is a well thought out move because the US economy is doing really well. Their supply side constraints are lifting, inflation is rising temporarily and they want to prepare to adjust for higher interest rates in a couple of years. In this aftershock, the metal and commodity stocks got impacted. As a result, there will be a temporary repricing of contracts for these metal companies because of strengthening of the dollar. This is temporary because the underlying demand is still very strong.
On the other hand, on the domestic front, there are four plays here; one is for the Indian stock market. Then there are the developed market plays which includes export companies like IT, pharma and chemicals. Then comes India unlock plays. Finally, there are the plays on the Indian economic recovery. Along with these four, there are a number of undervalued companies which will see some amount of rerating.
How are you looking at the financial space and playing the sector? Would you wait for a decisive dip to buy into the ICICIs, Axis and HDFC Banks of the world?
The financial companies have done a wonderful job across the board — whether they are corporate banks, retail banks or even the NBFCs — in cleaning up their books and increasing provisions for bringing down NPAs and raising capital to strengthen their balance sheets.
Today they are in a far stronger place than they were even pre pandemic and therefore whenever the economy revives, the banks are more ready to lend either to the corporate consumer or even the government for that matter. So the private sector banks, which primarily were consumer facing like Kotak Mahindra and HDFC Bank, are still trading at about five times, six times book value.
On the other hand, some of the smaller banks like
are all trading under book. As for the corporate facing banks, they are trading at really inexpensive valuations. It will be a case where their valuations will rerate up as industrial activity picks up while retail banks will continue to hold their valuations. The alpha lies in more midsize or the more corporate focussed banks.
How have you looked at the numbers that have come in the QSR plays like in the FMCG space?
It is a two different stories over there if you look at the FMCG companies — whether it is beverages or shampoos or biscuits — the volumes were down in May over the preceding month because of the lockdowns and unlike last year, there was not a further increase in volumes but quite a sharp fall this time. This can be attributed to two reasons. The second wave was probably far more intense and temporary held back consumer confidence. Therefore spending on some of the discretionary items within the FMCG space has also slowed down.
On the other hand, food deliveries continue to remain very strong. Sitting at home with nothing to do helped Jubilant Foodworks. Its plans of expanding into a number of newer initiatives will also help the company.
In terms of FMCG, it is kind of treading water and delivering returns but the more discretionary items and the more cyclical or economic recovery related stocks will come back stronger in the coming months assuming there is no third wave.
