How are you advising clients to play the volatility in the markets?
To be fair, there is a small correction from the tops. We are seeing only about 4-4.5% correction from the top while we have been waiting for like 10% correction. So it is not necessarily bad. Markets have to correct every once in a while and so if you are a long-term investor, you will probably be happy to get stocks at a better price. Can one get the same stocks that one was buying at better prices compared to one week ago? Yes, but compared to two months ago, no. So it is a bit of a mixed bag. I wouldn’t advise any action. I do not think one needs to take action every 2-3% but you have to watch because when you are looking at the way bond yields are moving in India and in the US, it may account for a different kind of action.
What would you buy if the market falls another 5%?
It would depend on what fell the most. IT for instance continues to be an attractive proposition for us despite having run up. I do not think IT has run up to a point where you can call it extremely overvalued. I would avoid FMCG and a lot of the pharma pack but I would pick up IT and at some points auto and auto ancillaries if they were to come down another 5% or 10%.
At this point, I am a little wary of financials given the bond yields and given the RBI statement about NPAs coming in. So the Supreme Court order is due any time now which will remove the relaxation of revealing NPAs and perhaps that will open out a new can of worms. So, avoid a lot of financials for now. But again broadly, you will find a lot of midcaps that continue to be attractive even though the results have been very good in the December quarter. But that is on the back of a bunch of action that is happening. Some of the midcaps will see continued action.
Why is pharma an avoid?
One has to be selective. The larger caps are not showing any signs of participating much more on the upside while a lot of the midcaps have rallied. They have reached some kind of peaks in valuation and are going to fall a lot more. They come to very attractive levels. We might look at them as well but they are also on my valuation spectrum. I would go first for IT and then look at some of the others including pharma.
Again one of the issues is we have not had a lot of the standard issues we have had in the past like FDA issues, etc, for a long time and this sector itself is plagued by one-time issues that come and then hit certain companies and then go away. We have not had a cycle for a while and that is a bit of a shake-up that usually happens once in a year or once in two years. I expect some of that to come back as well. More importantly, I do not think this is the right time to buy.
When prices change, opinions will change as well but right now, other sectors like auto and auto ancillaries, some of the manufacturing, infrastructure, IT are more attractive from a valuation growth perspective than pharma is.
What is your outlook on overall capex revival?
There are multiple layers here. The issue is what goes first? The infrastructure capex may be even in the form of the government spending on railways, roads and so on. The private capex is more like expanding plans and we get a lot of players in that. Companies which manufacture electrical equipment like L&T will be in the underlying infrastructure in terms of both greenfield and brownfield capex.
There will also be regular manufacturing capex for companies which manufacture boilers. Plus, because of the knowledge economy, a lot of capex is disguised as opex. All the research that is happening is based on knowledge. We are seeing a lot more of the knowledge economy based capex flowing into the economy. However, if you look at debt levels, debt credit growth in the economy is at 5.93%. This is not the whole amount. We are not seeing corporates taking on debt to fund capex. Some of them are doing internal accruals, some of them are just replacing regular debt with capex so not a vast increase in credit is going into corporates.
Total corporate credit has not changed much from 2015. So for capex to show an impact, credit growth has to rise quite dramatically in industry and that is not happening as yet. We will wait and watch and be very positive on this. We have a bunch of players on our portfolios who will benefit from it. I expect some part of this to flow to the economy and after September, October, perhaps the data will be visible.
What is your outlook on the defence space? Is this a sector that you would look at?
It has been a theme for a long time and I do not know if the government is actually putting money behind words on achieving self-sufficiency because even next year the amount of money they are spending on defence is relatively small. We continue to favour a lot of non India equipment; maybe this is not logical but it happens. The bureaucracy prefers it because it is more time tested, well known, there are less complications. People get questioned for making decisions and they will be questioned for deciding to buy from an Indian player who is relatively new versus a foreign player who has been in the market for a long time. But this transition has to happen over the next 10 years. I believe Indian private players will be a huge part of this. The public sector companies have done okay but they are not able to grow or innovate dramatically. I hope the forces also recognise this. The defence minister recognises that more incentives have to be given but till then, this will be a very slow process.
Everything that the defence ministry does has an impact on the underlying companies only 18 months from then. So, even if they say something today, even the companies that are participating will say we are not going to see new orders for another 12 months and then to fulfil them it will take another six to 18 months. So, the results will be seen much later. It is a good theme but one that offers delayed gratification.
Where within autos are you still finding comfort to buy afresh?
The sector itself is vastly overvalued. Most of the companies have a lot of cash. The two-wheeler space is quite decent, as is the truck and the rest of the commercial vehicle space. Players over there can be looked at as revival comes in. Also, auto ancillaries, some of which provide support to both road transport and personal or commercial vehicles and also the railways are the space to look at.
We have a bunch of investments in the space and we are not unbiased but going forward, we have to see that increase in personal mobility translates into more car sales. We are relatively underpenetrated in two- wheelers and personal mobility in general but definitely more in four wheelers. While it will take some time to recover from Covid and to get credit into the system, the impact largely will be on commercial vehicles and four-wheelers. Two-wheelers have already started to do well. That impact will continue over the rest of the season. I am very positive on the sector because it is not extremely overvalued but a lot of the sectors are too overvalued for me to take a deep fundamental call. Here, I am more comfortable with valuations and cash levels.
What about banks? Is there any comfort within this space or is it a blanket no-no for now?
We had SBI. That has done well but overall the banking pack is not something that we are focussed on. We have been interested in
which was relatively lower valued, compared to book. But now that has also changed. However, the problem is how do the NPAs flow outward? This is the first time we are seeing a lot of retail NPAs come to the forefront.
A lot of the banks that have retail assets are also going to get impacted as much as with small and medium businesses. These two factors make us believe that a lot of corporate oriented banks are perhaps a better bet than the retail oriented ones. So, perhaps ICICI or Axis will probably do a little bit better.
Having said that, I still do not know about the impact of the NPAs. Last quarter, many banks saw a fairly large amount of profits primarily because of treasury gains. Their net incomes from interest were relatively stable or flat and sometimes negative also in case of some of the big banks.
So the treasury income saved the day. This time there will be a treasury loss if prices continue where they are so near term. I believe banking is not the greatest place to be. When more transparency comes in and prices reflect that, we will take a look at that sector again.
Banks do not do great in low interest environments. One has to anyway reduce positions but it will be useful to be in certain banks when the market comes back, I will reserve my judgement for when and which stocks based on how the NPA disclosures pan out.