Do you now have confidence in investing in the PSU pack ex banks?
One has to a bit selective in the PSU basket and what we like best are those companies which are in defence manufacturing or ship building. There we are seeing very good earnings visibility, seven-eight years type of an average order book position and eventually as and when revenue starts to scale up, we will see those businesses start to report exceptional numbers. The valuation even at present is quite attractive.
Companies like Bharat Electronics or Bharat Dynamics, Garden Reach, Cochin Shipyard are all quite interesting. Within the real estate space, a company called NBCC is another interesting company, which should show significant improvement in its revenues over the next few quarters considering the order book it is sitting on. A disclosure: we and our clients have invested in NBCC.
So we need to be a bit selective as far as PSU stocks are concerned and on the oil and gas side, I am not that enthused unless we see a very good privatisation of BPCL and that may electrify all the refining companies like IOC, HP as well and they may get re-rated. But that is completely event based. So within the PSU pack, we are focussing more on engineering companies and defence companies where we feel there is good earnings visibility.
What was your strategy for Tata Power? It had gained much traction and was being seen as one of the electricity stocks to play the decarbonisation theme. But it has been losing its steam.
We are not that positive on Tata Power at this point of time and I think a lot of positives have got captured in. The stock prices are moving up because we were just) about understanding their strategy for renewable energy on the distribution side, but I think a lot of the positives have got captured in and a fresh trigger in the form of maybe hiving the renewable segment as a separate company and getting private equity investor or a strategic investor would take the valuation much higher. That could be a trigger, but apart from that, it seems to be more or less fully priced.
What would be the implications on companies and their selling price when we know that the EV vehicles are going to be priced at par or at parity with what the traditional auto companies are pricing their models. This is a highly competitive space. The number of cars being sold are not going to increase, only a shift of market share will happen and EV vehicles are competitive which means for the incumbents and existing auto companies, there is more pressure and more high spend on margins and more compression of profits also.
That is right. Their competition is coming from private equity investors who have got deep pockets and are in a position to take losses. But the existing auto OEMs do not have that mindset where they can make that transition profitably to electric vehicles and sustain those losses in terms of development and whatever subsidisation which they may do.
So to an extent, the Street is justified in ascribing a lower multiple for auto OEMs but the entire EV challenge at least as far as passenger vehicles is concerned and how the transition will take place is still many years in the future. In India, it will take a while to go mainstream, although on the two-wheeler side, we may see the entire revolution taking place much faster.
So there is a bit of uncertainty but my sense is that cyclically we should see an upswing in auto OEM stocks and that is one sector that we are positive on, once the stock market revises and this correction is over and done with. One will have very good short-term news flow in terms of higher productions and the benefit of all the cost increases which they have taken will translate into higher operating profit margins. Also the base effect will come into play.
Although there may be some uncertainties over the longer term, at least in the medium term these companies report exceptional results right from the December quarter onwards and that may certainly enthuse investors coming back into the auto OEMs. Companies like Maruti have been huge underperformers over the past several years and one may see that reverting back to long term averages over the next few months.
I am assuming that you are buying Reliance for your clients.
I am not buying anything right now. You did not ask me my view on the market and we are quite negative at this point of time. Whatever rallies come through, we are taking advantage of that to lighten up our positions. After many months, we are seeing a correction. So far, it has been timewise 5-7% correction. This may go deeper and I expect a minimum 10% correction in the Sensex and the Nifty. Of course, we will have up moves as well counter rallies but I think the next few months may be a bit challenging for equities and one needs to be a bit cautious.
We are seeing relentless selling from the FIIs. A lot of money has got sucked in by the IPOs and after this particular earning season, we had many disappointments as far as the margins were concerned for many companies and not just specialty chemicals.
But across the board, because of higher input prices we are seeing huge declines in operating profit margins and given that scenario, we cannot bid higher and higher for those companies. It is a combination of a few transient factors which may lead to further correction over the next few weeks or two-three months. So investors need to get a bit cautious.
So to answer your question, we are just being a bit cautious and holding back on our purchases. You may find that stocks are available at really attractive valuations maybe a couple of months down the line. Right now, it is a wait-and-watch and look for places where the deeper corrections have taken place and where there is a good amount of margin of safety, which had been missing right for almost a year and a half.
