Let us start by talking about internet companies going public in India. It starts with Zomato, goes on to PolicyBazaar and then hopefully Paytm in the next 60 days. Are you excited about owning Indian internet companies?
I think it was long overdue. There is a lack of choice if you want to play the internet space in India. So it is good news that more companies are coming to the market. Obviously, the key to the whole space is that do your work on each individual stock. It is a very competitive space.
Currently, the Indian market has two large parts: one is the compounding trade in IT and pharma and then you have cyclicals and industrials. SBI, cement, steel and industrial stocks are making a comeback. Historically, foreign investors have shied away from buying into commodities, industrials and metal stocks in India. Has your view changed now?
Ten years ago, domestic cyclicals and industrials were market leaders. But since then there has been a massive underperformance. So I think foreign investors would not shy away from those parts of the market per se. Until we see more entrenched capex cycle domestically, foreign investors will probably stick to compounders, IT and pharma stocks. On any sign of a sustainable recovery in capex, industrial sectors will probably attract more attention.
How would you view IT stocks in the light of the recent run-up and the fact that the top four IT companies are no longer trading in mid teens or late teens PE multiples? TCS is nearing 30 while Infosys is nearing 25 PE. Do you think these stocks can still give double-digit returns in next 12 to 18 months?
As you rightly point out, the valuations are no longer what you might classify as cheap or even average. They are certainly looking slightly pricy. Globally, we have had a large debate on whether inflation is coming back or not. When markets, particularly in the US, think that inflation will come back, growth stocks get derated.
At the moment, it looks like a return to the status quo. People are looking to pick up growth stocks again. I don’t think there will be derating any time soon. It is a part of the portfolio. It will be sensible to have some exposure to those names because they would certainly attract interest from foreign investors.
How you are looking at the entire PSU basket?
The PSU space is a difficult one for a lot of investors, particularly from those outside of India. The fact is that we have a choice in many sectors and not just financials where you have PSU names.
There is a valuation difference. PSUs offer very cheap valuation, but clearly the way the businesses are run are rather different. For any so-called cheap stock, you need to have a catalyst to narrow the valuation discount.
How different is the current rally from the previous rally which we saw 3-4 years ago?
The midcap space has been very robust recently. The valuations have moved up considerably, but they are still at a discount vis-à-vis the main indices. So you can argue that there is some upside left. I am not sure if foreign investors have got too involved in the space. If you can find some smaller stocks trading at a decent valuation discount in the broader market, then midcaps are quite attractive.
