The chemicals space has been a traders’ favourite and in the last few years, it has been an investors’ favourite as well. To a large extent, it works like a commodity space. What is your view?
This sector has been both a traders’ and investors’ delight over the last three years or so and it will continue to be that way for the next two to three years or more. There is a company called Gujarat Narmada Valley that trades at about six, seven times. There will be an additional boost in the short term because of the Suez Canal blockage chemical prices for some segments went through the roof and this company benefited. More importantly, over the medium term, it has shown more than 30% plus growth and GNFC at six times is a no-brainer. Even if it goes to eight times or nine times, which is below the sector averages, still the returns will be fairly substantial.
This story repeats itself across the sector. Take SRF. It is a far bigger diversified company and more than 60% of overall revenues come from exports. That is another important thing. I would be looking at companies which are heavy on exports to the US and the UK. The developed world would do far better than the domestic faced companies because they are vaccinating a greater percentage of the population there. The economy will open up faster and these companies will grow faster and stock prices will go up faster as well.
What is your outlook on the entire pharma basket?
There are many pharma names like
which have still not run up. They are going to produce something like 500 million doses of Covid vaccine. They have a vaccine facility which will aid that growth in addition to its traditional business. We all know that Covid is here to stay for the next couple of years for the most part of the world. Vaccine growth will be very strong given that in a few months’ time, they will start talking about a booster dose. These companies are growing well north of 15% and at about 15-16 times versus some of the other pharma trades which are showing higher multiples. So this is a good example.
is another good example. It has an IPO coming up and Laurus Labs is an API manufacturer and is also in the formulations business. All these companies will benefit in one way or the other by either supplying the raw materials for vaccines or being a vaccine producer themselves. This will be an additional growth booster. This opportunity did not exist until March of last year. These stocks look attractive and while the big run has been made in some of these stocks, another 25% plus run this year is eminently possible.
Anything in the IT space? The big five IT companies have delivered their numbers. One common commentary has been that in FY22 they will manage to grow in double digits. Do you think all this is already priced in the stock prices of TCS, Infy?
The latest corporate earning numbers coming out of the US ahow 75% of the companies in the S&P 500 have beat estimates and US companies in this quarter are likely to show a 30% plus EPS growth. Those are phenomenal numbers for the number one economy in the world. The US GDP is going to grow close to 6.8-7% and all these companies are unlocking after last year’s Covid lock.
Fortunately for them, they have a population size far lower than India, only 300 million people versus our 1.4 billion people and therefore a lot of the sectors like retail and a lot of the services companies which are big users of IT plus financial services, will show robust order bookings in IT and plus Cloud. Tech Mahindra is a good example, the company has margins below Infosys and TCS but will still show a phenomenally good margin improvement over the next 12 months.
This theme repeats itself across the IT space large and small and they will deliver at least mid teen returns through the CAGR over the next year or two.
The financial space has not done very well. Banking stocks have underperformed more or less the whole of 2021, Do you see any opportunity there?
We are in the midst of the second wave. Other nations have also had the third wave. So, maybe we will have the third wave also. But the difference between last year and this year is that vaccines are available now. The peak of the third wave will probably be far shallower than the second wave. IMF and others have made these big projections of 12% GDP growth for India. Now because of the Covid wave, those projections will be revised down. It may grow subpar for the rest of this year, maybe 5% or 6% at best. That is not a great number for an emerging economy with 4-5% inflation.
Then we have two types of banks. On one hand, there are the HDFCs and the Kotaks of the world, trading at four-five times. Will they trade at 6-7 times? We do not think so. On the other hand, there are banks like the
which are trading at under book at 0.7. Can they go up? I think that is possible. As a sector, it is unlikely to outperform the broader market. I hope I am wrong but that is the feeling that I get.
