Do you believe that the market undertone continues to remain quite buoyant or do you think that a correction is on the cards?
We had that massive rally post the Union Budget in February. The market has been listless around February 15-16 Feb and we had reached a near term peak of around 15400 odd mark. We are just about 500 points from that level as we move into July. So for five months, the markets have been quite listless. There was a depth in between because the Second Covid Wave was pretty severe.
Now the market is awaiting the next rounds of results. Some results have come in and they have been pointing towards a buoyant FY22. IT, have been the leaders and being globally exposed, they do not face the difficulties of the domestic businesses, some of which have suffered from the second wave.
Having said that, some of the incentives that the government has been pushing out will start getting reflected in the results as we go forward. While broadly, the manufacturing sector may face a bit of a problem, the services sector can rebound quite sharply. We are expecting buoyancy returning to the market after the results season is over. It would be pretty broad-based in terms of the rally.
The buzz word this week has clearly been Zomato. There are clear indications as to how retail investors have lapped up this mega IPO. What have you made of it? How are you advising retail investors? A lot of new age tech IPOs including Paytm are following suit?
Investors had a bite at Zomato via the
stock. Info Edge has a stake in Zomato. Having said that, we were expecting a very strong response for Zomato because of all the IPOs that have come so far. This will be a very unique IPO. This is a tech unicorn IPO that comes out once in a while. I would put it this way, that not just once in a while, perhaps it is unique to the extent that we have not seen any such IPO before.
Having said that, the valuation of Zomato was being keenly watched. There are different sets of ideas, different sets of ways for evaluating Zomato. This company comes in the backdrop of huge losses, it comes with successive rounds of equity dilutions happening in the past and potentially it may dilute further and profits may be elusive for a while. But the uniqueness and the deep penetration possible in a Zomato like IPO or the business that they run makes this IPO very lucrative, very attractive.
Our simple advice for most investors is get a bite of this IPO via Info Edge which is less risky. When it comes to the IPO, as far as retail investors are concerned, it is a lottery process and one is not sure of allotment. Therefore, it is safe to make an investment and hope that you will play out the lottery well. This is a stock which we will advise investors to hold on to for a long duration. It is not meant merely for a listing gain. This is a really long-term play.
Where do you believe the market positioning? Is there scope for bigger upgrades or bigger downgrades coming in earnings this quarter?
We should really focus on the guidance being offered by various managements. The second wave has hit businesses in a big way but what is more important for any upgrade or a downgrade is what is the guidance that the management is providing because that is interlinked to not just the business top line, but also to how the costs are shaping up and how margins are playing out.
Most of the companies would be able to offset the lack of revenue growth by better margins. In the banking sector for example, the uptick in margins has necessarily got to do with credit cost. So if the credit costs are going to fall going forward, there is room for better profitability growth even if the top line growth in terms of the loan growth is tepid.
Look at metal companies. The margin guidance in terms of their conversion cost or conversion margin is going to determine how the profitability is going to be. In the case of the manufacturing companies, their ability to raise prices even with tepid demand will tell us that they will be able to protect their margins or upgrade their margins.
I am not saying that all managements talk about margins very freely, but margin is something that we will watch out for and even in the services industry, we will see an uptick in margins. The IT companies are the biggest service providers and they have very confidently talked of a margin upgrade Wipro, which reported lower EBIT from a margin perspective, has already guided for the year’s EBIT margins to be higher than what they achieved in Q1.
Our thesis or focus will be on margins of companies going forward because if not now, six months or 10 months down the line, revenues will recover and profits will sour. From an upgrade point of view, most of the companies are poised for that in terms of breaking out of their margins and we believe that once the result season is over, most of the companies or most of the analysts will be able to upgrade their earnings focus as we move forward. That means we should see a rally ahead once the earning season is over.
