When you approach financials and you are talking about how the infrastructure play can lead to quadrupling of valuations, banks, NBFCs, financial sector will play a large role. So for financials, what is it that you are doing for your portfolio? Is it private sector banks, public sector banks, are you looking at the mid-tier banks as well?
By and large, we are bullish on financials but obviously depending on the beta that one wants to build in their portfolio, even the large private banks are quite cheap and they will give modest returns but with low risk. If somebody wants to chase high beta and look for little high risk, high growth, high returns then I would look at mid-sized banks and even public sector banks. But just to put that into perspective, at this point in time, we are bullish on everything financials.
Read Also: What is the right portfolio strategy in this market?
How much of your bullish thesis in some of the industrials like , is already in the price?
The way I would think about this is that if the view is for 6 to 12 months, perhaps the near term upside is captured and the stocks may consolidate. But if you believe in a nine-year cycle coming forward, then these stocks can deliver very good returns over time.
If anybody is trying to build a three-year, five-year, ten-year portfolio, I will still like to be bullish on industrials. Over the cycle, earnings growth triples or quadruples and that is the factor behind margins doubling, working capital cycle coming down and utilisation levels picking up.
« Back to recommendation stories
So, the valuations in these stocks today are mostly the down cycle earnings. Remember between 2012 and 2020, we were in a down cycle. Now, we are just at the start of an up cycle. There is very little delta which has yet to come in terms of earnings. On those earnings, the valuations look expensive but as earnings keep on getting upgraded with margin expansion and working capital improvements, then the valuations for these stocks are not necessarily expensive.
So in a short-term view, maybe they will consolidate but if you are looking for a long-term view and want to play the whole cycle, we will continue to be bullish.
What is your thought on cement? One is the usual demand-supply dynamics which we always consider before judging it but now there is a new entrant dynamics. The fear is that now we have a big new entrant in the cement space and that could lead to a price war which is never good news for shareholders. Is that the biggest overhang and fear in cement now?
Sure it is and to some extent, I would say that that risk is already priced in the valuations as well. We are currently more neutral weight on cement at these valuations. So, near term I agree with you that there are headwinds, coal prices continue to be high, the diesel prices continue to be high and there are cost headwinds. There is also the risk of price war and the new entrant as you speak about.
So in the near term, the sector may go through some more correction and that is why we are neutral weight. But when I was talking about a long-term capex cycle thesis, cement will participate in that rally too.