How do you think India Inc has done in Q1 given the second Covid wave? Going forward, could it be a little more challenging in terms of quarterly numbers for corporate India?
There are two trends. One, corporate India over the last one year has actually reduced debt across sectors by about 5-10%. So, there is a conscious effort to improve their balance sheets to reduce debt and therefore margins will improve.
Second, because of the pandemic, the operating leverage going forward will increase simply because capacity utilisations for most of the manufacturing or even services companies are running at 50-60%. So the need for capital expenditures is largely diminished going forward at least for the next couple of years.
These companies can comfortably grow across sectors and I will come to the other bit in a minute across sectors at least for the next two or three years. Higher profitability means higher margins and the markets can sustain higher market multiples. This is on one side.
On the other side, export facing companies like information, technologies, pharmaceuticals, chemicals, textiles are operating at close to full utilisation levels. Their margins will improve because of increased volumes. Against this backdrop, the domestic companies will face some amount of margin pressure but export faced companies and companies with low capacity utilisation will see improving margins.
For a long time, you have been very bullish on IT. Do you see pressure on the bottom line, on the margins for IT midcaps and smallcaps? Do you see that being a challenge for further rerating of these stocks?
I have always maintained that in every boom cycle, IT services companies always see an increase in attrition simply because some other employer is ready to pay a higher wage. So there is increased demand, which means increased orders. That is a good thing from a bigger perspective. At individual company level, higher attrition means extra amount of money has to be paid for in retraining and that hits margins. But going just by the volumes increasing, I would say the IT sector is positioned very well.
If you look at back to school this year, in the US that is a $32 billion per year spend and it is going to happen in the next few two-three months. When kids are going back to school from studying at home for two years, buying new laptops, new phones, new school bags, etc, will mean a $32 billion spend which also increases the IT spend. So both the order books and the volumes for the IT industry continue to be very robust. I think we will see earnings upgrades.
How have you read into the entire reopen trade? Given that the pool is very large and we have got hotels, QSR, aviation all packed in there, where do you see fresh buying opportunities?
In the reopen, we look at the smaller items first in terms of consumer items and then move on to the bigger items. Companies like Mahindra Holidays will do well. Second, jewellery shopping companies like Titan should do well as not only the wedding season, the festive season is also coming. Third is the white goods space, TVs. Dixon people talk about demand for the festive season inventories building up. So, TVs, mobile phones, electronic goods, ACs, fridges should see more sales. Also, companies like V-Guard, companies like Dixon these are the companies which will benefit.
Travel is still some time away. Also, Indigo is not that cheap in the context of rising fuel prices and falling volumes.
Housing will come last on the list. Companies like
, will be towards the end of the list but these are the sectors that we would focus on.
What are the other sectors and stocks that you think could show potential from here?
Metal stocks like Jindal Steel and Power,
and Nalco continue to look good. has announced that it is going to separate its power business from its steel business. As that happens, the stock looks even more attractive. If you start assigning steel multiples to Jindal Steel and Power, the longer term upside. over the next one year is significantly higher. The stock can be 50-70% higher.
As for Tata Steel, European demand is very strong. Domestic demand will recover at some point, leverage is coming down. Demand is picking up in non-European markets. All these things, plus China putting an export ban on all these various factors, will help not only Tata Steel but also aluminium players like
and Nalco.
