Global brokerages — from CLSA to Macquarie — believe that energy costs pose downside risk for India equity markets. Having said that, month to date, we have seen the return of FIIs. In the last two days alone, there has been buying to the tune of Rs 1,000 crore. Do you agree with the brokerages which are raising red flags on account of margin pressure for India Inc expecting stocks to underperform from here?
We have had a very good rally over the last 15-month period and obviously there has been a great swing in economic activity even after Covid 2.0. The economy is on a tear and doing well and recent channel checks have shown Diwali has been pretty good. However, some part of it would have already been discounted by the way stocks have performed over the last 12- to 18-months.
Maybe we are stretching a bit going into FY24 and discounting some of the stocks to that level. To that extent, there would be some consolidation in the market which is expected because we need to see next one or two quarters of economic growth and also how companies are performing in this volatile period, because of the margin pressure and raw material price surge. It is more of a consolidation than a correction phase unless we have some sort of a Black Swan event again — which could be a global or a domestic event.
It could be more of a consolidation phase between 16,500 and 18,500 levels and maybe wait for one or two quarter earnings growth and roll forward to FY24. From a brokerage house point of view, I would say it is more to do with how China has performed over last 12 months and whether it makes sense to move some money from India to China, given the underperformance has been very stark, if we see the YTD performance of Indian indices versus the Hong Kong or China indices. It has more to do with moving some money from India to China. But on a standalone basis, if the economy is doing well and the momentum continues beyond pent-up demand, then it is more of a wait and watch game than just selling in the market.
Where do you feel there is money to be made? What are your big overweights and underweights sectorally?
I maintain that not all companies will deliver the kind of valuation they are trading at and this has clearly been seen in Q2 numbers where there has been volatility around growth or margin depending on the sectors and the companies and how they have delivered in terms of execution.
The metoo companies will not benefit. Only companies which are able to navigate these difficult phases of supply chain issues, raw material price surge, inflationary pressure and having pricing power to some extent manage the margins while maintaining the growth momentum, should be doing well now. I would say a strong brand or a strong pricing power company or a strong business model which has edge over others would continue to do well whereas the “metoo” companies will find it difficult to outperform quarter after quarter because that reflationary trade where everything was down, economy was zero and all stocks managed to move up because of the recovery and the global liquidity and the local liquidity is over. Now it is going to be a difficult task to make money, make a return from the stocks and that is where a well governed company with a solid business model will thrive.
If there has been one big theme that we have seen in the last couple of weeks, it has to be the gold rush for IPOs. The biggest of them, Paytm, is expected to list on Thursday. Then there will be the next wave of IPOs from PharmEasy, Delhivery, Mobikwik, OYO Rooms, Ola Cabs. What is the right weightage to have on these kinds of tech companies in your portfolio?
I would say we are in a significant digital super cycle. Especially after Covid, the mindset of the companies have changed and many have understood that there has to be an Omni channel kind of a model, than having only a brick and mortar model or having only a platform online model.
Clearly it is also a learning for us because new companies and new themes are getting listed in the market and so we have to be careful and cautious. But if the theme is good, if there is scalability of the business model, it should work out. We are trying to nibble around, trying to put in some money, wait for quarter-on-quarter numbers and eventually take a bigger call — maybe not now but after six or 12 months, to see if this valuation is really justified for the growth what they are delivering or if it is just the IPO frenzy.
Obviously all internet companies might not do well maybe two years down the line, but there would be one or two big winners which will become the star of the market or the winner of the market and might become part of Nifty as well! It is more of a basket approach, not to miss any story to start with but at the same time be very active, agile and cautious to ensure that it does not impact your portfolio in case the company goes down the drain after 12 months.
In your portfolio, financials have the largest weightage at 30%. What is your assessment as far as this space goes? On one side, you have , which is going one way — up-up-up; there is some very bullish commentary from HDFC wanting to partner with fintechs, ICICI’s blockbuster listing and at the same time PSU banks are coming back?
Among financials, one first needs credit growth, at least on the retail side. We are witnessing growth rates coming back, especially during Diwali. The channel checks that we have done has seen decent activity on the retail side including the home loan piece. However, corporate credit growth will take a longer time. Even working capital cycle growth might take a longer time because most of the companies are becoming debt free. They are becoming very agile with digital initiatives that they have taken.
There is a deleveraging mood among corporates and the analysis of the top 20 large corporates would have shown they are debt free or would have been trimming their debt as the opportunity comes. Even the mid good corporates are trying to trim debt and trying to raise capital from the market because plenty of capital is available. Good corporates are also able to raise capital.
On the MSME side, I would say there is no interest in many banks to go for a higher credit growth because there is a risk of NPAs or asset quality issues there. So retail is the only place where there is really going to be a huge opportunity for growth and banks which are able to embrace the retail side of the story, should do well. Overall credit growth might take time which might lead to a lower credit growth rate on the overall numbers. But retail focused banks and NBFCs will deliver good growth numbers in quarters to come.
