This may not be effective tomorrow, this month or this year, but as a trend which are the sectors where terminal value is going to deteriorate either because of competition, value destruction or ESG concerns? Which are the stocks attractive enough to buy but where the sector is losing its relevance?
There is so much disruption, ESG concern is making one think about the terminal value. As we think about the future trends, some of the things that have started impacting the valuations can be seen across the board. These are segments which are generating good cash flows today and good profits but are not getting rightly valued. With the launch of the electric two-wheelers, that is one sector which is probably going through that hangover. Also the valuation expansion will be under check for that sector. Wherever we see the trend changes and disruption taking place, those sectors will really go through the terminal value check.
Beyond that, these changes are also driving how the energy is going to be consumed and what will be the mix of energy. Given the environmental concern, at some point, the current energy source will become less and less relevant in the overall scheme of things. It is still too far away in the future, but at some point it will have an end or an expiry date. That will also hurt the terminal value.
As of now, we could think of these two segments but as an investor, we need to be very careful about what type of disruption is taking place. Things change very fast and that will lead to some amount of the valuations remaining under check for some of these segments.
What is the best way to bet on the ESG theme?
ESG is definitely catching momentum and it is going to become more and more relevant. When we are talking to companies and looking at their annual reports, we find that most companies, even within sectors which are slightly on the negative side of the ESG, have started taking action to come on the positive side of the ESG. So I would say that there is no question of totally ignoring sectors which today are looking slightly negative on the ESG side. It is more to do with how the companies and managements are reacting.
Even companies within the cement sector, which is considered to be bad from the ESG angle are being very proactive in taking action to change themselves and make themselves more relevant. So I would say important sectors are not going to be neglected. It is more how each company and management are reacting, which will then define where investment is going to remain.
I would say most companies are going to remain proactive and make themselves relevant. Pure clean ESG companies, the services sector and consumer oriented businesses like IT are becoming an important segment for us and will continue to remain important. We have a couple of these sectors which are in a way neutral to positive as far as ESG is concerned.
You have bought interesting niche midcap IT in the past. You were running a small cap and a midcap mandate as well. Anything interesting in the IT/product IT space which is catching your attention?
A big part of the IT rally has already happened and in the last one year, a large part of the trend change has got captured in terms of the valuations as far as IT is concerned. Still there are some areas or segments which are still available at decent valuations. IT businesses, which are linked to communication as a category and there are some smallcap IT companies which are still trading at decent valuations, where the past has not been so great but the future’s looking interesting because of some of the changes being carried out at the corporate level.
Barring some of these names, most of the other names are trading at very fine valuations. While there is no doubt that the business dynamics continues to remain strong and hence high valuations would also sustain, in order to outperform, one will have to look at some of the relatively reasonably valued IT companies where top level changes are taking place, the managements are restrategising their plans and those plans are falling in place. Those are the areas where outperformance can be looked at from the IT sector per se.
