On quality of earnings
The first quarter is just like last year. The first quarter is a quarter which is not going to be that great and so commentaries are also cautious. Of course, everybody is using the terminology “assuming third wave is not severe”. People are hopeful for the second half of the current year. April was good but May was very disappointing and in June, from the third or fourth week onwards, most corporates have started seeing some recovery. So for the April to June period, there is nothing much to talk about.
Of course, on a YoY basis, it looks great but on a QoQ basis, it was impacted by Covid. However, one of the few important points are that exports are doing very well. Global economies are doing very well and so companies which are positioned for export growth are posting reasonably strong decent numbers compared to pure domestic focussed companies.
Similarly, capital expenditure companies are also reporting reasonably good numbers compared to what was expected a few quarters back. Corporates are more hopeful about the second half of the year and they expect recovery to be strong as one moves forward.
On capital goods companies and L&T in particular
Within the capex category, there are a number of sub-segments to play in India. So, while we have companies like L&T which is a giant, if you want to go for real capital goods play and which is just not the construction of roads and ports and railways but much beyond that, then there are a number of sub-segments.
For example, there are bearing companies. We have invested in this space for quite a few years and we remain positive on that space. Similarly, there is also a pumps segment. Now in this industry also, just like bearings, there are three-four companies globally and, the three companies in India are all subsidiaries of the parent companies of US or global companies. They basically control most of the market and as the industry starts recovering, two of such companies have come out with extremely strong numbers, very strong EBITDA margins, very strong gross margins and also reasonably good revenue growth.
I would expect the same trend even in the other sub-categories of engineering space. Pumps is one segment on which we are positive. Some segments which are uniquely positioned are the managements of data centres because that is going to be huge and will be fuelling growth in India.
The companies which are catering to those data centres, are also going to do extremely well. I am talking about the engineering segment. We are positive on this segment. There is one segment which is into automation and innovation, robotics and process engineering. We are holding companies like ABB Power Products,
, Timken. So a combination of such companies is reasonably positive. A disclaimer, we own these companies for our clients and PMS.
How are you analysing financials and what is your stance on them?
Banking and finance is a proxy to Indian economy and Indian economy is going through a painful time due to Covid related issues — be it the MSME segment or the retail segment. While structurally we remain positive on the top institutions of this country, we have been underweight on banking and finance for quite some time. From now on, we have started adding weightage to banking and finance and within that, we are sticking to the companies which are high quality institutions with the best of the asset quality record.
As the impact of the Covid second wave reduces and most of the things come back to normalcy, we expect even the NPA cycle to come down. Corporate recovery is going to be reasonably strong. The loan book growth on corporate side which has been low single digit, can be expected to improve because the corporate balance sheet is also improving and that is one area which was a cause of concern in the last bull market also.
This time the deleveraging by corporate India has been very sharp and that is good news for the Indian banking system. We are incrementally positive on banking from here on. We have been underweight on banks and we are now slightly adding to the weightage in this space.
Do you think good correction is looming and whatever may be the trigger, it may land up making Indian markets healthier?
There is no bull market without corrections and similarly this bull market also would see a number of corrections. During 2003 to 2008, when Sensex became five times in five years, it witnessed corrections of 20% and more so in Sensex — seven to eight times — in those five years. So corrections are normal. One should continue to expect corrections in the market. But from the current market standpoint, I would like to focus on two important things.
One is do not fall in a trap and do not buy junk stocks. As the market keeps moving up, the quality of the so-called tips which people keep discussing, is always questionable. So avoid such companies. But remain in the market, do not under invest. Remain over invested in equity as an asset class but stay away from low quality, poor quality stocks, that is the first thing.
Secondly, people keep talking about corrections and that people are waiting for a correction from last eight months but it is not coming. Two things are important, the corporate earnings growth is going to be very strong and the corporate balance sheet has also equally improved. So on one end, there is strong earnings growth and on the other hand, there is an improving balance sheet. Thirdly, there is strong liquidity. A combination of these three factors means that even if the correction comes, one should keep investing.
It is a buy-on-declines market. Do not worry too much about it. In an environment where inflation and the interest rates are 5-6%, equity as an asset class will keep outperforming the inflation on any other asset class over the next 5-10 years. So I am not too worried from the broader market perspective. But yes, I do worry about the euphoria which gets created in a few segments of markets. One needs to be extremely conscious of and cautious of it and should not get into it because then, wherever there is a 10% correction, such stocks would go down 30-40-70-80%. That is the only word of caution from the retail investors’ perspective.
