The longer term story for insurance is penetration in India. Is this the kind of sector you would want to play keeping in mind that it is a very long haul?
I completely agree. A long-term investor must have insurance stocks in the portfolio. These are great compounding businesses and timing wise, this is the best time to get into insurance stocks as they have been underperforming. There were certain knocks on their P&L on account of higher provisioning which is transient. My sense is once the pandemic is over and done with, people will be more focussed on taking insurance, especially life insurance, given the experience many people have gone through and that should sustain demand for all types of insurance products — be it savings linked or even protection.
I also see a very bright future for group linked insurance products with many more companies giving protection to their employees given their experiences of the past year and a half or so. I am very positive on insurance companies. They will be gaining market share and we should see steady compounding of earnings for these companies. It just requires a little bit more understanding about how to value insurance companies but by and large, it is a great sector to be in and eventually a lot of insurance companies will find themselves in the Nifty and the BSE Sensex and become as large as the banking sectors stocks are just now at this point of time.
Let us look at the second derivative impact on the IT sector. The boom in the sector is accompanied by real attrition happening and a real wage hike. The start-up ecosystem is also going public. Who will be the biggest beneficiaries of wage inflation and higher spending?
This is a great time for IT employees and the clear winners will be the real estate sector, especially in towns like Gurgaon, NCR region, Bangalore and Hyderabad where these IT professionals are concentrated. Once real estate starts doing well in those pockets, then automatically the demand for building products, appliances and a whole host of related and allied industries will start doing well.
Also there is more spending power within the economy. So consumption starts to pick up for a whole host of FMCG products as well as non-durables, automobile companies, two-wheeler companies and it has got a super impact. Once IT starts to do well, it has a super impact on a lot of industries and because of rising wages in the IT industry, it also impacts other sectors within the organised corporate world. These are great trends. IT companies are facing challenges in talent management but on the other hand, the business flow is so strong that they can absorb these challenges and it is nothing new for them.
So I am not that concerned from IT companies point of view but as you said, because of higher wages, certain industries and segments are going to benefit incredibly. But it is a good development and in the next two, three quarters. Once normalcy has been restored, companies which are strong in those geographical areas, will start to do much better and report better earnings.
After a great run all of 2020 and even starting of 2021, would you say that the best of pharma is behind us or the approach should be to buy these dips in pharma?
I am getting increasingly concerned about pharma and that old bogey about price correction in the US generic market that has come back big time and is impacting a lot of business models. One should get very, very selective in pharma. On the other hand, domestic business has done exceedingly well and looking good because of increased focus on healthcare, better infrastructure and higher awareness.
I would like to tweak the pharma portfolio and look for companies which have got speciality products in the US market like Sun Pharma or caters to domestic oriented businesses like Alkem or ERIS Laboratories. Some companies like Ajanta Pharma could be the new winners, considering that they have very low exposure in the US generic market. So one needs to get a bit selective in pharmaceutical shares.
As far as the Covid opportunity is concerned, that has got discounted now and it is back to business as usual for these companies. The old business models of just selling more and more generics to the US market will not work out because price erosion is significantly higher than molecule introductions. So it is time to get a bit selective and a bit cautious on pharma and look for other opportunities in other sectors. Within pharma, look for differentiated business models.
is getting rerated after its tie-up with HDFC late last year. What should investors be looking for?
Piramal Enterprises is going from wholesale lending into retail lending with the acquisition of Dewan Housing and on the wholesale lending side, because of improved prospects of the real estate industry and the aggressive provisioning which they have done, further credit losses on that particular book can be ruled out. As and when the retail loans pick up, you should see gradual steadiness coming into the profits and higher valuations as well.
The real joker in the pack is the demerger between the pharmaceutical business and the financial services or the NBFC business and that could be a great value unlocking opportunity. The Piramals are known to be extremely aggressive when it comes to any business that they are into and we expect that even in the financial services NBFCs, they would show the same kind of aggression. Perhaps after getting into wholesale and retail lending, they may even look at other avenues for funding like consumer loans and even other segments in the NBFCs. We cannot rule out further acquisitions as well. The balance sheet is in a pretty decent shape and they have the capacity to raise further funds if required. So generally, very positive on Piramal Enterprises given its size, scale and the management quality and the fact that there could be some value unlocking opportunity.
We have seen a steep price correction play out in the listed multiplexes — PVR as well as Leisure. What about the reopen trade? Is it time to buy now?
I am sure we will see a good strong trading rally in INOX and PVR as and when lockdown restrictions are relaxed and once the theatres start to function at reasonable capacity. Then there will be blockbuster releases which will drive the crowds. One could see a nice pop in PVR as well as INOX but I am not so optimistic about the medium to long term prospects given where the valuations are for these companies. These are capital intensive businesses and traditionally rather low return on investment.
Also after the pandemic, there could be some change in entertainment preferences. One cannot have the same level of enthusiasm for going into multiplexes as one had before the pandemic given the wide variety of choices that are there now on your cell phone, tablet or through the OTT products. So, while one could see a good strong trading rally and positive sentiment because of lockdown restrictions being removed, I am not that optimistic about the medium to long term prospects.
All the losses these companies have taken will suddenly impact their expansion plans, quality of the balance sheet as well as risk taking ability. I would not like to buy these companies at these levels but existing shareholders can look forward to good trading upswing over the next two to three months or so.
What is the way forward for Siemens?
There is nothing new about the fact that Siemens has been an expensive stock. There is always I would say concentration of holding because of very high parent stake in the company and it has got a loyal band of shareholders. The shortage in the stock always ensures that it is at a premium plus. It has got that FERA MNC kind of aura around it which generally means that people will pay a premium for the same business.
Having said that, one can expect a cyclical upswing in the earnings of the company. Also over the years, they have been gradually transforming themselves more into products and processes, factory automation and focusing on a lot of new generation technologies, rather than power projects which were low margin and a drain on the balance sheet because of high working capital requirements.
A lot of those positives are being captured into Siemens and while it could be a steady performer over the next two-three quarters, I do not expect the long-term prospects of Siemens to generate steady compounding returns over next three to five years, given the present valuation. I would like to avoid Siemens at this point of time. It is a company which you can continue to remain invested in because over the next two-three quarters, maybe next one year, will be excellent for Siemens but beyond that, I do not see much of a visibility. I would not consider it as a candidate for fresh investment.
Why is Max going higher when other insurance stocks are suffering?
The makeup of Max is very interesting in the sense that it is not a bank sponsored insurance company and because of that particular disadvantage, it has worked very hard on building an agent and distribution network. Now that it has got Axis Bank as a strategic investor, those avenues of distribution also are open for Max. It is an aggressive company which has built business pretty well over the last decade or more and they are now focussing on diversifying the products and also looking at improving their margins as well.
Some of the uncertainties around the deal with bancassurance deal with Axis are now over and done with so, we are seeing a gradual improvement in the prospects, better investor interest and it is trading at a discount — in terms of valuation — to the likes of SBI, HDFC and ICICI Pru and there is some catch up to do there as well.
So superior earnings, slight discount in terms of valuation, aggressive management, opportunity for M&As which they were pursuing — all are positive aspects for Max and certainly it is a candidate for the portfolio of anyone with a long term view. But as I said earlier, insurance is more of a three- to five-year type of play and you will see steady compounding of earnings. These are great businesses to be in when the chips are down and we have a bearish phase in the market which will come eventually. Right now, in a bull market, you may see these stocks underperforming but one needs to prepare for bear markets and that is where insurance companies come into play.
