What about real estate? It is a multiyear cycle. But a stock like DLF has not even beaten its IPO price of 2008. Would you increase your allocation as far as this goes?
In the housing-oriented real estate sector absolutely. We think that there is a huge, probably five to seven year boom in the housing sector on the anvil again for the same reasons. It is a rate sensitive sector. It is going to get strong support — both fiscal and policy wise — from the government because the real estate sector is the largest employment generator and as we head into the 2024 elections, employment is going to be the key factor on the agenda.
I expect the government to fully support the real estate sector with whatever it needs. The fact is people have not purchased houses over a significant period of time. Today the differential between a post tax interest cost on a housing loan at 6.5% and 40% tax is we are talking about sub 4.5% effective interest cost. If we get a rental yield at let us say 2% also, it is just with 2.5% investment from your side and you are in position to buy a second house, a third house and a fourth house.
So housing property as an investment is going to get a fresh boost because of these confluence of factors and the government will support it fully and yes, real estate is a part of those sectors I just spoke about where the market being linear thinking just cannot predict because they are high operating and high financial leveraged companies. Even a small increase in topline leads to a phenomenal increase in the bottom lines. It is hard to sit and predict and use a calculator to say oh they grew at this percentage over the last three years they will grow at that percentage. It is impossible to predict and the winner will take it all but be very stock specific in the sector.
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If we look at the top five sectors, in the last earnings season, IT had the smallest weightage of 9%. This earnings season also good numbers have come out; margins are under pressure because of attrition. How should one look at IT considering the valuation runup even in the tier-2 companies?
IT is an essential component of a portfolio whether it is large, mid or small. There are three strong headwinds for IT; the first headwind is one where as the US gets back to the growth path and the dollar strengthens, the rupee has to weaken because as US interest rates rise, RBI which so far has accumulated the results and allowed a general depreciation, will be forced to have a sharper depreciation as otherwise interest rates will get hit. Our view of a weakening rupee over the next decade is strongly positive for IT.
The second thing for IT is that we have been through this Y2K kind of a moment with the pandemic, with the whole world moving into digital, internet, cloud and AI. It is affecting a lot of areas and the IT demand is going to go through the roof.
The third thing that is favourable for IT is that though India started with ITES, we our companies have progresses with value addition and so I do not think there is a threat from any other countries in the region like when the BPO industry got hammered by Philippines and other countries coming in with very low costs. As IT moves into consulting, India is in a sweet spot and the proof of the pudding lies in the kind of salaries that are being offered in the IT sector.
There is a labour shortage in the IT sector. Much of this is in the public domain and the market has discounted a lot of this. So with all of these bright growth prospects, IT forms a safety aspect of the portfolio but clearly it is not going to be the multi bagger, but so what? The certainty and safety element of the portfolio is equally important as going behind multibagger kind of returns. IT will be an essential part of one’s portfolio for the coming five to 10 years.
Is there a conscious strategy right now given that midcaps had a great time in the sun and the fall is steeper right now given the high beta nature of some of these high flying midcaps? Is there a conscious strategy to wean out midcaps and deploy a larger allocation to largecaps from your end?
That is not necessarily true because there is a sectoral leadership change happening in the mid and smallcap space. There will be profit booking in what has already gone up but redeploying it within the mid and smallcaps in terms of future growth sectors, there is ample opportunity.
We will allocate more to largecaps if there is a tapering related largecap correction which brings down those valuations. Today, because of the FII flows, largecaps are are at very reasonable to higher valuations and so shifting into large caps when the liquidity support from the FIIs is going to go down because of tapering does not make sense. It is a matter of time before the US economy recovers and tapering is going to be a reality.
The time to buy largecaps will come when that kind of tapering related corrections come and the valuations turn reasonable. A flexi cap approach is the best, not necessary that we have got to look at the cap-based valuations and make shifts. It is about finding growth opportunities at the right price. Growth at a reasonable price should be the mantra and it will come in largecaps at some point in time and that is when we will accumulate those.
