What are you telling your clients – enjoy the party as long as it lasts or do a Cinderella and press the eject button before it is 12 o’clock?
This is always a tricky question and the answer is relatively simple. We tell our clients that there is a case for booking profits in your portfolio. Maybe some percentage of the portfolio should have cash and that is what we are telling them. We are not suspecting or doubting the growth potential of some of the good quality companies and that is where we tell them to stay invested. Even though some of the companies are quoting at a premium of 15-20% in some cases, we tell them that there would be a correction of at least 10% in some of these companies.
Nonetheless, if you do not want to trade the portfolio, you should stay invested or else a part of the portfolio should be used for trading and maybe booking some profits and buying at a lower level. This is a simple advice that we communicate to all our clients and from the PMS point of view, we believe in retaining some part of the portfolio in cash in this high market.
Are we at the beginning of a new ride when it comes to metal majors and specifically ?
Cyclicals are here to stay, according to me. Most of the cyclicals would probably have a good time going forward. We have been talking about steel companies enjoying good demand and also a waiting period as far as the customer is concerned because the demand is outstripping supply. Most of the steel companies for the last few months have been enjoying this particular journey, wherein they are having orders in advance and their supplies follow thereafter. Capacities are running at full.
Clearly there is a price-led growth in their books because of the improvement in global conditions as far as the commodity prices are concerned. This in turn is fuelling higher prices and resulting in volume-led growth, resulting in better margin and better profit performance for these companies.
From the perspective of looking at the long term, given the fact that we are in a capex mode as far as industrialisation is concerned, commodities like metals definitely would have relatively better time along with cement. That is where retail investors will ride this particular rally because it is likely to be strong going forward. It is generally seen that the first two years when it starts recovering in the cyclicals, these commodities have the tendency or the habit of producing a significantly higher amount of return for investors. I would think that there is still some journey left and so stay invested with commodities. Some profit booking at a regular level and then re-entry at a lower level could be the norm given the volatility into the market.
How are you positioned within autos? Where would you recommend increasing exposure?
This is probably one of the best times for autos as far as their journey is concerned. In the last so many years, most of the auto companies have been languishing, particularly Tata Motors. The Tata Motors JLR portfolio has been on and off as far as their business is concerned. But now having corrected the balance sheets and also working on a lower cost structure, along with the improvement in demand in Europe and China, the JLR portfolio is in a relatively better place. Back home in the passenger vehicle portfolio, most of the Tata Motors cars are enjoying five-star ratings in a crash kind of a situation. All in all, the passenger vehicle portfolio back home along with the commercial vehicle portfolio with increased demand coming in, Tata Motors remains a very favourable choice as far as investment is concerned. One wonders how significant is the discount between the main stock and the DVR. I feel the DVR stock possibly has a case for re-rating. So remain strong on Tata Motors and Ashok Leyland.
What is happening in Hindustan Aeronautical, BEL, BEML — the pure defence plays? How should one play the defence shift from overseas shores to India? Which is the best company to bet on?
The localisation of defence as far as India purchases are concerned is an extremely good move. It would bring a good amount of business to the names which you have mentioned. However, the bigger challenge remains with the companies which basically supply to defence. Assuming that some of the defence companies would also be in the hands of the private sector, eventually the companies which are supplying to the defence sector and railways sector, work on a very thin margin. They do not enjoy the possibility of generating better margins. So that possibly remains as a hindrance as far as investor prospects are concerned.
We would remain extremely careful about where exactly the companies are producing better margins and growth. We like BEL for sure. However not very sure about the expansion on the margin and improvement on the ratios. That is the reason we are not whole-heartedly going across in putting across our bet into some of the defence companies.
We strictly believe that this is a big time opportunity for some of these companies. We need to get a lot of validation and once the investors’ ratios start improving for these companies, putting a bet on them would be more meaningful.
HUL came out with a good set of numbers, Britannia numbers were decent, Pidilite reported highest margins and profitability. Why are these stocks not going higher?
The market is running on a good amount of momentum and people are willing to take a lot of risk in this market. Most of the fundamentals are getting ignored and many people are basically riding the wave. So from that perspective, some of the defensives like FMCG, pharma and IT will not get the preference in this market.
Those who get preference in this market are the cyclicals. I agree with you that the fundamentals of these companies have not changed, maybe some amount of time correction into these stocks will see buying emerging again in these companies because they fundamentally remain very strong.
ET Now: Is there still opportunity in pockets like speciality chemicals with a longer term view?
Deven R Choksey: I am glad that you mentioned the word longer term. For the longer term, two companies —
and O2C — are making progress in the specialty chemicals space, apart from many midsize companies.
My take would be that some of these companies would probably see commercialisation and that would drive a higher amount of growth, particularly margin growth, for them. I am distinctly bullish on the prospects of these two companies because I believe their capability and capacity are going to be stronger and we will see larger numbers coming out from them.
Rest of the companies have also been progressing well but as you rightly observed, some of these companies have reached fairly rich valuations. Maybe, they would hit the time correction period if not the price correction and that could be the time to buy into some of the midsize companies which have scaled up ahead of time.
