It seems the market got its vaccine shot much earlier!
If we look at what is happening in some other markets like Bitcoin, the stock market seems to be moving hardly at all. Bitcoin moved 20% over the weekend. We are in a total frenzy zone now. There is no valuation left overall. People are just buying the trend. In the Indian context, the news of the vaccine is positive from the economic standpoint. The key is how much of it is already factored into the valuations of the market, which now trades at 24 times next year earnings and that has been the highest in the last many years.
The debate is there but the key is that as the vaccine rollout and there is an aggressive rollout, there will obviously be some winners from the depressed sectors and to that extent, sectors like hospitality, multiplexes and possibly airlines could offer opportunities for investors.
In the week gone by, we saw PSU resurgence. Would you now change your opinion or is it still in wait and watch mode to finally see whether materially any disinvestment goes through and then perhaps take a call?
As a result of the significant rally in steel prices, some stocks rallied. Second was Bharat Electronics where we have seen a steady gain. Besides that, it is tough to find value in PSUs because of the way they are run. Also, there is a continuous postponement of the process of divestment in BPCL. I do not think PSUs have any great stories. However, when the markets rally and the tides move up, then it lifts all the boats and that is what has been happening in the markets today. This is not only the case of PSU stocks, this is true of many other laggard stocks as well where there is a significant flow of money — Rs 62,000 crore came in from foreign investors into Indian listed equities in December. It is a huge amount and once that kind of money is coming in, people start looking at laggards which have not moved. And that leads to money flow into those stocks.
Auto sales data will come in today. Already we are seeing an uptick on a couple of companies that have reported on a year-on-year basis like Eicher. There’s a 40% uptick there. What are you expecting?
Eicher has done better than expected because the expectation was muted. However, among other two-wheeler companies — both TVS and Hero MotoCorp — have underperformed expectations. That is what the ground report is suggesting on the two-wheeler side and these retail sales are slackening now and so to that extent, these stocks could be underperformers and the huge uptick in input prices could also hit their profitability going forward.
On the four-wheeler side, the story is somewhat different where the sales are holding up and the companies are also sounding optimistic. That is where investor interest could gravitate. Maruti has done reasonably well and it has not rallied as well as the other two-wheeler companies and Tata Motors continues to surprise on the upside.
These stocks could see positive interest possibly. But again that margin question remains for all auto companies and that is what I will be monitoring when the results come out for this quarter. We have to see how companies are seeing their margins and getting impacted because the rally in some of the input prices is very significant. Steel is up 55- 60% over the last six months. It is very tough for manufacturing companies to adjust to this kind of raw material pressure.
The interesting bit here is that four-wheelers are doing okay, two-wheelers are plateau-ing and CV is bottoming out. Time to relook maybe CV makers?
There are two CV makers you can play; one is Tata Motors which is more a global play so Indian CV market does not impact its valuation too much. The second is Ashok Leyland, which at Rs 100 already factors in a recovery. That play unfortunately is not available because the recovery play is already there in Ashok Leyland.
The minute you say market risk, the risk could be looking at the way metal stocks, real estate stocks, beaten down PSU stocks, under-owned PSU banks are making a comeback. What is the best thing to do in this kind of market?
For some part, you can be with the trend but the vaccine approval and the way the caseloads are reducing in India, it seems we are avoiding the second wave which has come through in many other markets. It might be premature to say that but that seems to be the reality today.
If that is the case, then one can look at some of these companies which are still beaten down like Indian Hotels, multiplex companies like PVR or Inox. These have significant value. Even luggage manufacturers like VIP Industries still trades at 50% of its peak value without too much debt.
The visibility in the immediate future is low for them but there is deep value in these companies. In my view, it will be tough to reach double digit index returns this year, given the valuations of the market and the significant optimism with which we have entered the year.
It makes sense for investors to be with companies which are relatively under-owned and where people are expecting that recovery will be much later but it is coming faster and these companies have actually cut down costs. Whenever the recovery comes, the profitability will increase faster as we saw in the case of many other durable companies like two- wheelers and companies like Voltas, Havells etc where they cut down costs and when the uptick came the profitability improvement was much faster. You could bet on many of these beaten down stocks along with some of the infrastructure, capital goods companies.
