Are you worried about valuations getting out of the whack for most of the sectors? TCS at 38 times, IT sector itself being at about 35 times, 34 times one year ahead. Doesn’t it look like the best is factored in?
The overall market valuations are at above average levels. The Indian IT pack very surprisingly is trading at a big premium to some of the global majors which are very different kinds of companies. So TCS trading at premium valuations as compared to let us say Google or Facebook or Microsoft causes concern. The interest rate party will not continue forever. So, obviously we are seeing signs of some amount of inflation building up.
Monetary policy normalisation is on the cards in terms of at the first level reduction in the pumping in of liquidity or some withdrawal of liquidity and down the road, some increase in short-term interest rates. So definitely it is time to be cautious. It does not mean that you should sell everything and stay in cash. There are pockets of value. One has to be discerning in terms of what one buys at this point in time. It is not definitely a market where one can indiscriminately pick stocks and expect to make a lot of returns.
The other point is that the returns from here on one should expect to be moderated significantly. One cannot take the past 12 to 18 months as a benchmark and project future returns anything near to that. In fact, one has to be extremely conservative and look at future return possibilities from here on.
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You have made some new additions in the last month or two — Power Grid, ITC and from the financials ICICI Bank and Axis Bank. What is that about?
Going into the pandemic we had reduced the weightage on lenders very significantly and kept the private sector banks we thought were the best placed in the financial space to ride out the storm. But despite that, there was uncertainty in terms of what would be the NPA levels coming out of Covid.
By now, things are clear that the Covid situation has not proved to be a fatal event for the lending companies and a lot of shakeout has happened where weaker players have exited the lending space or have had very significant reduction in market share. So the private sector banks are well positioned to benefit from the CASA deposits that they have. In an overall environment where lending rates could creep up a bit, we could see a scenario where the market share shifts from the PSU and some of the weaker banks to the well run private sector banks. So that has been a space where we have been adding investments.
Some of the other names that you mentioned things like ITC or Bajaj Holdings or Power Grid are companies where valuations are reasonable and where the frenzy of the last 12 to 18 months has not really been there. These are not very high growth companies where one could see 20-30% kind of earnings growth but these are stable free cash flow companies where the combination of dividend yield plus earnings growth will deliver a decent amount of total return. Power Grid has been monetising some of their past assets via the InVIT route. That really improves the business prospects for the shareholders of the company.
