It has been a month since the broader market has been outperforming the frontliners. While banks have laid low in June, will we see more traction building up within the broader markets or would there be a phase of consolidation?
We are waiting for the next earnings season. A lot depends upon that because typically from July 15 onwards, the numbers start coming in. Stock-specific volatility can be expected. We remain extremely positive on the banking sector and we expect that once the Second Covid Wave is over and done with, we should see a good resurgence as far as bank stocks are concerned. These are a good play and proxy on the economy. With the economy starting to do well and double digit growth expected on a low base, it should result in a decent demand for credit. NPAs also should be under control. So, we are very positive on banks.
This is a great market. Smallcaps, midcaps and large caps all are doing pretty well from time to time. There is a sectoral rotation as well. It is a nice broad-based rally and should continue given the kind of dynamics which are at play just now.
Auto sales numbers are in the fast lane. Given the phased unlocking and the pent-up demand, do you believe that going forward this traction will continue?
I would think so. Interest rates remain pretty low. All the issues relating to BS-VI and some of the other regulatory issues and higher taxes which the state governments had levied are not completely absorbed. If the demand remains good, auto companies will be able to pass on the rise in input costs and operating leverage will come into play. We can keep our fingers crossed and hope that such numbers keep coming through as far as volume and production are concerned. Auto, which has been a mild underperformer during the second Covid wave, should start to do much better over the next two quarters.
Zomato is planning to go public in July followed by Naukri and Policybazaar. Is there merit in buying some of those so-called internet related stocks?
Absolutely. Investors need to allocate some of their money into new generation digital businesses and on listing, very decent gains may come from these companies. We are very positive on such new-age businesses simply because that is where the growth is going to be. Optically it will appear expensive but if you have a 3-5 years type of horizon for holding these stocks, then they could give very good returns over that period of time. Right now, there is not much of choice when it comes to buying pure internet businesses.
I know there is Matrimony which is listed but by and large the performance of that company has not been that great. But growth companies like Zomato or maybe Policybazaar which are clocking 20% to 40% growth rates, could certainly be considered. One company which comes to mind right now, of course, is Nazara Technologies which is a gaming company and again it is a completely online business model. If you have a reasonably long-term horizon, then this company can deliver very good returns going forward over the next three to five years or so.
It is a company which can easily grow at 30-40% during the period and eventually it will start generating very decent profits. Right now it appears to be expensive because the EBITDA and the net profits are on the lower side, but once operating leverages come into play, this company also can deliver very good results. Disclosure that we and our clients are invested in it.
If you have to lay your bets on some great compounding stocks with reasonable valuations, where the downside in a bad market could be 15-20-25%, but where you are confident of a 20-25% earnings growth, agnostic of market cap, what would you buy?
I would lean towards technology companies. One could look at a blend of large cap and midcap tech stocks. They will do very well. The likes of say Infosys or for that matter even MindTree or the L&T twins — LTTS, LTTI. I would like to add Nazara Technologies to that basket. There are some interesting businesses like IndiaMart, Affle India or for that matter companies like Route Mobile and Tanla. They are also worth mentioning at this point of time.
All these companies have a very unique business model. They are new age, high growth businesses and if there are no blowups over there in terms of corporate governance or in terms of disruption in their particular model, these companies can deliver exceptional returns over the next five to 10 years or so. By 2030, you will see that they have gained considerable scale and a lot of profitability and top line revenue. They may even be part of the indices in seven to eight years time. So, I am very positive on these new businesses.
On the IPO side, very exciting companies are coming in for listing like Paytm, Zomato. Policybazaar is considering coming; then there is BYJU’S. All these companies should give exceptional returns. I look at the Nasdaq market and how such companies have done over there and how much value they have created. Look at the Chinese market and how the Chinese digital businesses have done over the last four, five years and I feel pretty confident that these businesses need to be understood better but they are great value creators going forward.
How should one look at the Thyrocare-PharmEasy deal?
Both segments should do very well and at the end of the day, these are high ROCE businesses, low capital intensive as compared to actually setting up hospitals which is typically a low ROI business. From the point of view of returns, diagnostic companies should give very decent returns over the next three to five years or so. There is going to be a sea change towards consumer thinking as far as healthcare is concerned, especially preventive healthcare.
We will see spending on diagnostic tests, on hospitals, on medical care, on pharmaceuticals going up over the next few years. It will become a larger part of the household budget. So we are very positive on all of these companies. The Thyrocare deal is extremely good and it may transform Thyrocare completely into more of an online medical or healthcare provider which is what Apollo Hospital also is trying to transform itself into. These are very powerful trends and if they are managing to succeed and get the business model and the service levels right, then growth can be stupendous.
There is a great need for quality healthcare within our country — be it in rural areas, urban or even semi urban areas. If the average user is comfortable using online medical health advice, ordering pharmaceuticals online, then these are hugely scalable models. Like with education, something similar could happen on the healthcare side as well. One could look at these companies in a positive light and businesses which have got such opportunities are always going to be expensive. So, buy them at corrections or have a longer horizon and they will give good returns over a longer period of time.
