What do you make of this sudden correction in the market? Do you think the market is suddenly taking a note of valuation and that the growth is not as high as what people expected?
It is more about Pied Piper and people following. It’s a herd mentality kind of a thing. People are rushing to sell some of the higher relative valuations stocks. I do not think it is about the high valuation stock because Hindustan Unilever still trades at 60 times PE and there is no selloff over there. It is only a question of relative valuation versus relative growth. Now IRCTC, a relatively low margin business, was trading at 60 times and, of course, there was an expectation that their other new lines of businesses will come in. So that is an example.
Now a similar example can be seen across sectors both largecap and midcaps. I think that has led to some profit-taking and also following the Piper because when somebody is selling, the others are following suit. But otherwise, the underlying revenue growth and earnings growth is intact. 70% of all the companies that have reported earnings in India so far have beat expectations.
How can one approach this choppiness in the market? How should one use this opportunity? Should one buy companies that are continuing to deliver but there may be some supply pressure?
It is different strokes for different sectors. In banking, credit growth has remained negative all through the year. Just in the last couple of weeks, credit growth has turned positive and numbers show that its credit growth at 17% is far higher that of the overall banking industry average and therefore we are seeing a positive reaction on the stock.
Axis Bank is again well positioned. It has cleaned up its books. The loan growth will be faster than that of the industry. There are no new Covid provisions and that can be one approach where one looks for companies where fundamentally they are reviving ahead of expectations and there are enough companies out there across sectors still.
The price band of Nykaa IPO was announced last week at a 1025 to 1125 and a fundraise of 5350, given the kind of valuation that it is coming in at would you be a subscriber to the IPO?
Indeed, the company has grown phenomenally well and run by a former investment banker and she has done really well for herself. The amount of capital raised and the market that they reach and including their own home brand has grown phenomenally fast. This is coming at a point in time where online businesses are taking off because the pandemic has accelerated the migration or rather the increased usage too. Therefore, Nykaa is very well placed, it has a wide reach. It still has a sufficient runway for additional streams of revenue growth and therefore it is an IPO which will do really well.
How do you maneuver within consumption space because clearly the raw material cost inflation is turning out to be a big devil when it comes to either volumes or margins, whichever way the case?
Indeed. Some of the companies are managing to pass on some of it, PolyCab has done it. But in consumption names, it is more about market share. The revenue growth has been north of 25-30% which means clearly demand is coming back. Margins have been anywhere between 4% and 8% lower because all prices have gone up due to supply chain bottlenecks. Consumption is a very interesting pick and an RBI survey done last week shows that roughly half the people think that things will get better and half the people think that things will not get better.
Now that is always good from a financial market perspective because that means expectations are still in check and there is further upside is possible. This is probably one of the worst quarters for negative surprises on the margin front which people know now. Incrementally, the damage from lower margins is not that high and accelerating revenue will take care of stock returns.
