We will soon be hitting the earnings season. This time the general view in the market is that the impact of the second wave will be felt and corporates will be more vocal about admitting that the quarter gone by was almost like a washout one. Is the market prepared for a poor earnings or management commentary?
I really do not think that April to June results will matter that much. Anything exposed to global economy should have done okay because the second wave was a very India-specific phenomenon. So sectors like IT, etc should have done pretty okay. In terms of domestic sectors, the market will be forward looking. It has been more about the commentary or the real-time demand which corporates are seeing. It will also be about how much raw material pressure is going to be passed on and what is the outlook on margins.
As an investor, I think the challenge is not in the April to June quarter but going forward the challenge will be to figure out how much is pent-up demand and how much is recurring. In sectors like travel, the pent-up demand is broadly of 15 months because we just had a narrow window from November to February. Travelling will be higher this time because people know that vaccination will protect them. The challenge is to figure out how much of the earnings growth will be long-term and how much would just be a reflection of pent-up demand.
So where within the market do you find a confluence of growth as well as good prices?
All of us have the memory of April 2020. Most of the stocks are 2X from there. If you are anchored to that, you will not find stocks. Look at what India has done from a five-year perspective. If a mean reversion, not even in full, happens in the next 3-4 years, then the earnings growth in banks or commercial vehicles should surprise.
It is unlikely that the overall market earnings from FY21 to FY24 will be below 18-20% CAGR. The call on the domestic monetary policy is also important.
It is not a classic value fund manager’s dream market but if the earnings growth is going to be strong you have to pencil in the PE. If the earnings growth is going to be strong, I do not see why you should be very pessimistic.
Would you go against the global trend and buy power companies, utilities and ITC? There is a school of thought which says do not buy NTPC because it pollutes, do not buy ITC because it is in the business of tobacco and do not buy anything which is not environment-friendly. In India, do you think ESG investing is here or one should actually think the other way?
ESG is too strong a trend. It is going to become an intrinsic part of DNA of most companies, whether it is a financial or non-financial company. I think ESG is too big a thing to see it from a short-term perspective. We have also grappled with the stocks you have mentioned. We have exposure to some of them. There is just too much value to ignore them. At the same time, there is a terminal value consideration in some of these stocks.
