A lot of experts are talking about skewing their portfolio towards the deep value stocks to fit in with the larger rotational play. Do you agree with that or do you think that the deep value stocks have already run up?
A lot of the deep value names that one is seeing are either in the PSU space or in the cyclical space. PSUs have had a bad name in the market and rightly so. For many years, there was capital misallocation happening. In the last cycle, when oil prices were going up, the marketing companies were not increasing prices and selling fuel at a loss. Plus the regular drip of disinvestment would happen from the government in terms of secondary market offers and things like that.
This time around, clearly the approach is that one cannot continue doing that and the focus has shifted more to privatisation and strategic sales. We have already seen the announcement as far as Air India goes. The negative perception about PSUs is changing a bit. The other thing is that in a lot of these companies where the cash flows have been good and where the underlying business economics are reasonably intact, are trading at very low valuations, whereas some of the hyped up sectors have really gotten to levels and something of a mean reversion is happening.
Some of the power names are near monopolies in their area of operations and we have also seen some of them monetise their assets by way of InvIT sales and things like that. It is really improving the business characteristics for some of these so-called deep value names and definitely people should be looking at that space rather than chasing some of the new IPOs where there is no underlying free cash flow and only a promise of glory down the road.
Have the tech stocks peaked out?
It would vary from company to company. The midcap space has run up very significantly and the overall IT pack has also gone up quite a bit. Valuations in a lot of companies were getting out of hand and the results coming in are more of a reality check. It is not that the sector is not growing or profits are not there, it is just that the expectations that were built up in the valuations had gotten a bit out of hand and we are seeing some corrections on that front.
I would not say that the story is over, All the positive factors that are there in terms of the demand drivers in the post Covid world, where people want to move to the digital space and improve the customer online experience are there. But one has to be mindful of the valuations that have gotten out of hand.
Could there be a shift from the midcap IT stocks to the largecaps — a different kind of a rotation?
Yes, that would be correct. Some of the midcap names have gone up almost 10x from the Covid lows. Obviously one has to be mindful of the valuations there and no company can grow profits at that kind of pace. A lot of these are now quoting at 50 times earnings and 55 times earnings. There could be some disappointment for people who are buying at these levels but the underlying quality of cash flows, quality of management, demand drivers remain in place.
How would you look at the manufacturing sector where there has been substantial changes?
Manufacturing covers a broad spectrum. They have the capital goods manufacturers, metal manufacturers as well as the automobile companies. A lot of these are extremely well run companies. The product quality is good, the capital efficiency is there, the growth vision is there and one should look at this space and pick up selectively.
