What Chandra did to TCS or what Salil Parekh has managed to do to Infosys, can the new management do the same to Wipro?
Yes, it is very much possible. We have seen that stocks get re-rated whenever there is a big change at the top and to give an example, Britannia also saw similar kind of activity. In fact, for Wipro, this has been a very long wait. For almost 8-10 years, they were not performing well and had very meager growth and lagged industry peers. But in the last nine months, they have picked up a lot. They have to catch up much more but at least there is a direction and thinking that we are going in that direction.
They have taken the very bold step of making a very big acquisition. That shows there is a change in thinking and whenever there is a change in thinking stocks normally get rewarded because people are always looking for something new.
Also valuation is in their favour because in the past, they have not done so well and were trading at a deep discount to all their peers. Now that valuation catchup can happen and definitely a re-rating will happen. The stock has already moved from Rs 300 level to almost Rs 500. There is still room for growth and if they continue to show this kind of zeal to grow, the stock will get re-rated.
Would you buy into diagnostics and pharma stocks like and Glenmark?
Cipla and Cadila both are in our buying list. Even Dr Reddy’s is there. We like Gland Pharma and
. We like all these companies for specific reasons. COVID is an additional reason. It will be a temporary phenomenon and secondly, things are changing by the day. So we do not know how much opportunity is there. Also, it will be more humanitarian and less profit making issue for these companies.
Besides all these companies are doing well because of their own specific reasons including the product pipelines. In the case of Gland Pharma, it is injectables. There is a shortage for injectables. Out of the 25-30 products in the shortage list of FDA, five or six are made by Gland Pharma. That means there would be sustainable growth for a very long period.
In the case of Aurobindo also, it is the injectable segment. Now they are talking of unlocking value by separating injectables. I am not so bullish on Glenmark mainly because they will have to walk the talk. They have had this debt problem for many years. Many times they have done fundraising but somehow that debt has not gone down. Listing of the generic division and fund raising will help them in reducing their debt. I would wait for that to happen.
As of now, our preferred list consists of the other stocks that I spoke of.
Coming to the NBFC and insurance sector, we are expecting a stronger growth outlook on the credit cost front. a sequential uptake as well on the disbursements. Within these two pockets, where would you bet?
We are constructive on both these pockets and, in case of insurance companies, we have been liking HDFC Life for a very long time. For many months, it performed well but for the last one or two months it has been languishing. It gives an opportunity for long-term investment.
On the general insurance side, we have been liking ICICI Lombard which has been performing well. In between, the numbers did not come up to their expected levels but ultimately things are in place. Once the situation normalises, they will gain market share.
Among other NBFCs we prefer CV financiers. Chola Investment has been our preferred pick and in consumer financing, we like Bajaj Finance. Bajaj Finserv is a holding company for insurance and NBFC. These are the four-five picks in our NBFC portfolio.
Right now small and midcap stocks are outperforming but typically when inflation comes back and in a crisis, smaller businesses they struggle. What is the market logic in trying to buy small and midcap stocks?
That is one of the challenges. We see Nifty earnings of 30-40% for the next two years. In fact, as of now, the market probably has ignored this fact and inflation is not going to be very far. We know that all commodity prices have gone up, inflation in every service has also gone up, input costs are going to go up for all companies. Small and midcap companies have a bigger negative impact. The only negating factor is that in the last one, one and a half years, most of these small and midcap companies have brought in a lot of efficiencies in their working.
Their labour cost is the minimum possible because of Covid and for whatever other reasons. Earlier also they were on a cost-cutting spree. So that cost is saving. The travel cost is almost gone now because nobody is travelling anywhere. People are doing everything online and Zoom meetings are happening and so that cost is also gone.
Also, most of these companies in the organised sector are gaining market share from the unorganised players because they are not able to cope with the demands of the people and the working capital requirements.
Many of the small and midcap corporates have been able to handle this crisis well and have shown resilience. We have been talking to many of these small and midcap companies in the last two, three months and we find them to be very bullish. Even though input costs have gone up, they have been able to pass on the price hike. Prince Pipe has passed on the price hikes four times in the last three months. If there is no demand, how can they do that?
So, there is clear cut resilience in the industry itself and these small guys because of their efficiencies will be able to overcome this issue. Now inflation will definitely hit consumption and hit these companies but because of these efficiencies, some steps can be taken. After the June quarter, markets will start realising that and will start talking about the impact of inflation on these companies and if the earnings number would need to be tweaked or not.
