The market is getting very polarised or very sector or stock specific. If you bought into pharma, it is a terrible market; if you bought into banks it is an okay market; and if you bought IT, this is like a great bull market. Why is that?
Some kind of sectoral rotation is happening depending on the way the world is moving and how the economy will shape up. In the last one and a half years of Covid, there was a significant fall and then there was a significant climb of the market and there was a reflationary trade which was coming into play. Also from the earnings point of view, from the low of last March or April, the numbers have been pretty strong. When Covid 2.0 manifested, the numbers again were a bit lower than expected and now the expectation is that things will be back to normal. But this time, the climb would be normal because the economy was not stalled after Covid second wave.
Hence, wherever there is a surety of growth in at least next two to three years, money is moving to that side. As for why it is happening, clearly there are ifs and buts in the economy as to whether we will have a third wave also. So, wherever there is surety of growth and cash flows, money is moving there.
Global markets have been firm like a rock. With each passing day, S&P is making a new high. Nifty is also sitting at an all time high and the small and the midcap stocks have seen a sizable correction. Do you worry about when the reversal will happen and if there is a global correction or if benchmark indices start correcting, it could lead to bigger selloff and impact on the small and the midcap space?
Normally it is part and parcel of the market that whenever there is a high beta or a high momentum trade, the smallcaps and midcaps tend to outperform the largecaps and whenever there is a selloff, the midcaps and the smallcaps that is the caste and creed that they end up selling more because of various issues. I was pleasantly surprised that despite such a big rout happening in China and Hong Kong markets, the Indian markets have been able to hold on. That shows the maturity of the investors and the maturity of the market.
The Hong Kong market is down 4-5% YTD and we are almost up 14% odd. That is the outperformance that we have shown to the emerging market investors, given our ability to bring the economy back to pre-Covid levels, given our ability to manage the Covid 2.0 was much better than Covid 1.0. Barring a significant Black Swan event which will rattle the whole world, will face volatile times but it does not look like a big crash.
On one side, great growth has come back in IT. On the other hand, wage inflation will hit them in the coming quarters. In the near term, are IT stocks fairly priced or richly priced?
It all depends on how they are able to demonstrate their ability to outsmart the consensus estimate. As of now, the way the commentaries are coming, it clearly looks like there is going to be a good two-year double digit growth range and it might be between 12% and 15% or 12% and 18% depending on the size of the company. What we are seeing is the adoption of technology from the end customer side has gone through the roof and it does not look like a one time or a one or a two quarter kind of an event. It looks to be a bit structural at least for now.
We will have to see how things go but if we see global numbers of Accenture, it is apparent that it is not only India specific but globally, technology players are benefiting from the Covid crisis. So long that it continues to hold up well, there is a good momentum in the businesses. Technology hopefully should do well. We should not forget that these are very high cash flow, growing companies; they do buybacks, they do dividends and hence the growth plus improvement in ROEs is pretty important for rerating which is happening in this sector.
What about the banking space? ICICI Bank, SBI have been showing leadership but now HDFC Bank seems to be playing catch up as well. What happens next within banks because along with IT, all eyes are now on banks to buck the bulls forward from here?
So it will all depend on how the third wave comes and goes. If there is no third wave, then the momentum will pick up over the next one or two quarters in terms of disbursement and that will help in terms of loan book growth and also in terms of reducing the asset quality issue. However, if there is a third wave, then financials will take some more time. However, the top four-five banks have been able to manage this crisis pretty well. It is just that as of now, people are a bit worried. People will wait for one or two quarters to understand if there is a third wave or not and if we do not have a lethal third wave, then financials at some point of time will start showing growth.
Where else do you see scope for investment or value still on the table?
It is stock specific. Good stock specific activities are taking place and we, as a house, believe in bottom-up stock picking. There is hope for finding out new ideas either in the form of IPOs or in the forms of turnaround strategies or general momentum in the sector. There is a lot of activity happening across sectors and our job is to find those two or three or four leaders in the pack in a particular sector and just be with them with a two- to three-year view.
The market will now look at those areas where they see certainty of growth going forward. I know you mentioned that it is going to be stock specific, but if we are looking at promise and opportunity of growth, the answer should lie in the larger themes. Other than IT, where else do you see certainty of growth?
As of now, technology looks strong. In consumption, it will be stock specific but the sector looks to be coming back to normal growth trajectory. In fact, there was nothing wrong in the sector but there was a bit of volatility. So, consumption as a theme should do well. The infrastructure capex related stories or proxy to infra either in the form of capital goods or cement and other stocks also seems to be doing well. These are some of the sectors which should do well.
On the export side, we might argue on valuation but specialty chemicals continues to do well. On the pharma side, I have always been saying that it differs from company to company how they are performing but there are pockets of opportunities. So frankly I would say there are good growth opportunities across sectors.
Do you think that the massive rally in commodity stocks is behind us and now is not the time to look at these names?
Looks that way because we have to keep in mind that it is a global sector. It all depends on how the world moves but what we are understanding and hearing now is that it is causing inflation across the world and hence a further movement in the metal prices might not be good from the economic point of view.
Having said that, again, sitting out of India, it is very difficult to take that call because it is a global commodity. If nothing happens in the upcoming Jackson Hole meeting and the money continues to slosh all around, and no tapering date is announced, then prices might go up. But all these companies are operating at 80-85% or maybe even 90% capacity utilisation and now it is only price growth which will determine the future growth in terms of the business momentum and the earnings growth.
I do not know but it looks like that it will pause for some time before we get new capacities in place. We should not forget that because of chip shortage, the auto sector globally reducing production targets at least for the near term. So that should also put some breaks on the demand for raw material. I think it should consolidate or may be correct from here.
Broadly the idea is banks are a proxy for growth. But we are going through a phase where a lot of corporates are returning debt back to the banks — whether it is Reliance or . So what happens to the old theory which says buy banks as a proxy to growth? Growth is coming back but the credit growth is not even in double digits?
You are absolutely right and so we will have to dissect how the growth will come. The top 20 large corporates are deleveraging their balance sheets. Even below 20, there is a lot of capital available and hence a lot of QIPs are happening and midsized companies are trying to deleverage to the best of their ability. So the question comes where does the growth come from? Either it will be a working capital growth or you end up going to SMEs and MSMEs. In the SME and the MSME space, there are bifurcations. There are good people who would not like to take on more debt and there are people where banks might not be willing to lend.
We have seen how much money has been used through ECLGS scheme which shows the pain in the SME sector. So the leftover is the whole retail piece and that includes the home loan piece. It looks like growth will come for retail, including home loans and if a bank is positioned well on that side, then they will have a good momentum of growth maybe not now, but one or two quarters down the line.
