What are you making of the market temperament? At the index level, could we be in for some consolidation while the sectoral rotation continues?
We are in a classical bull market where after every move, the market spends a few months or weeks in sideways consolidation and within that, we have a very nice sector rotation and the good thing about the Indian market or Indian economy is that we have a very broad-based economy. There are very few markets where all the 15 sectors represent the market. As a result, sectoral rotation just plays out very beautifully amongst different sectors. If markets consolidate around these levels after the ferocious move seen over the last one year, it will be very healthy for the future course of this bull market.
What is your view on the underperformance in after the latest announcements that came at the AGM?
The stock had virtually doubled prior to that. If you look at the performance over the three-year or five-year period, I still think the stock has done phenomenally well. Reliance has made significant announcements in terms of IT investments and are likely to make more investments in their existing businesses as well some of the new ventures. The market needs some more clarity in terms of how exactly those investments are going to play out and more importantly, what will be the return on those investments.
It is pretty healthy for the market for a large cap like Reliance to consolidate at these levels after such a massive move. To some extent, markets were expecting some sort of tariff hike on the telecom side of the business where Jio would have been a big beneficiary. But now, given that we have an impending launch of the low-cost 4G phone with Google in September, it seems the tariff hike might be pushed back for some time and that has disappointed markets slightly.
The latest report on big tech says there is a strong opportunity for revenue surprises offsetting margin misses. Large caps seem to be in preference. Will you be very selective when it comes to the IT basket or do you see a lot of opportunity within the midcaps also?
My view is that after a very long time we are seeing a very strong uptick in IT spending. This current wave in IT is driven by digital and cloud. Most of the traditional businesses will migrate to cloud and we are just at the beginning of this wave which potentially can be very large. If that is the case, then both large cap and midcap companies will do well. In fact, Accenture recently made a very interesting comment on the earnings call where they said that they expect that over a period of time, every large business in the world will be digital and if that is the case, then we are just at the beginning of that trend.
Where would you be comfortable about adding fresh positions after the run up that has already happened?
We are taking a slightly more medium term view on our investment portfolio and we are looking at businesses which probably will do well over the next three years as the economy stabilises and opens up in the post Covid world.
There is a marked shift in terms of how the world and economy and consumer behaviour evolve in the post Covid world versus what existed pre Covid. One thing we are expecting and we can clearly see initial signs of is the revival of India’s investment cycle and a strong recovery. Just to give you an example, this year all the metal companies in India, especially the steel companies, will have the highest-ever cash flows in their history.
We see these companies making significant investments in capacity enhancements. After a gap of almost 10 years, we see a very strong recovery in India’s investment cycle and as a result we are looking at engineering and capital goods as a sector which will be a significant beneficiary as the investment cycle recovers. Apart from that, we are also fairly positive on consumer discretionary because consumers have been sitting back at home for almost a year and as the economy stabilises, towards the later part of this year, consumers will venture out and would want to travel or spend a lot on discretionary goods and services. So that is another area we are very bullish on from a slightly more medium-term perspective.
Any stocks that you would like to name?
A disclaimer, we have holdings or positions in most of the names that I talk about. Within the consumer discretionary, we like the retail segment and companies like
Fashion. We like hotels as a sector and are pretty bullish on Indian Hotels. Likewise, we like businesses in and around travel and tourism as well because we think we will see a strong resurgence in demand as consumers would want to venture and travel out as soon as things stabilise kind of a thing.
On the capital goods and engineering side, we like companies which are working on new age technologies. So, automation of the manufacturing sector or the shopfloor is going to be a big theme as all manufacturing companies would want to drive efficiencies. Likewise, renewable energy is going to be a big theme and we like companies in and around that. For example, we like companies like ABB and Siemens which are working on continuous technology when it comes to the investment cycle and which is where the next leg of investment cycle in India will be directed at.
What do you make of placing your bets on stocks within the hospitality space?
We are likely to witness a very strong resurgence in consumer demand because people have not travelled for a very long time because of the lockdown. As the pace of vaccination increases and as the economy stabilises through the year, we should see both leisure and business travel come back very strongly.
If we look at data points that have emerged from the western economies across Europe and US, as the economies are opening up, we are seeing a very sharp resurgence in demand across the travel and hospitality sector. I think something similar should happen here in India as well. More importantly, a massive consolidation has happened in the sector amongst the service providers because some of the weaker players in the sector be it hotels or service providers across the hospitality sector have not been able to survive this crisis.
As a result, some of these leading companies will actually exit the crisis much stronger in terms of their relative standing when they entered the crisis. So while the crisis has had a short term impact on businesses, companies with a strong balance sheet have emerged much stronger and for them the growth opportunity in the post Covid world will be far higher than that existed in the pre Covid world. We are pretty positive on the sector.
