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Inflation continues to remain a problem and RBI has categorically said that more action on the MPC front will be required. How are you looking at the banking sector?
A large part of the policy actions by RBI have been on expected lines. While the rate hike was expected, the discussion was on how much? Now we know it is 50 bps and the RBI’s guidance towards growth and inflation. Both of them have not been encouraging from the market point of view. The projected GDP growth rate is 7.2%, less than what global agencies are predicting at 7.5%.
Similarly, inflation is beyond the stated range that RBI has projected. That obviously creates worry in terms of the economic growth going forward and in terms of the impact on the market. Add to that the fact that although it is too early, in the first eight days of June the monsoon seems to have been below normal and the rains have not progressed as much as they were expected to. These are the sudden worries which have come over the market.
The RBI policy was partly in line with expectation and more of a monitorable. These new worries are getting added to a scenario where for quite some time global investors have been withdrawing money from the Indian market although the domestic money has continued to act as a counterbalancing fact.
One does not know how long that will continue and the pressure on the margins in the March quarter which has gone by. The result season is now more or less over. Net-net, things are not looking good, the inflationary pressure is still there. On the positive side, some things which can be noticed is that in the last five and a half months, except for oil, we have not had prices going up, specifically for metals.
So for steel, copper and aluminium, largely in the last five, five and a half months, prices have not gone up. They may come down. We are in a situation where the positive factors are fewer and negative factors are more. That is why we are continuing to see time and absolute correction in the market.
What is the outlook on the unlock theme? Some of the stocks like Lemon Tree, PVR, have all been abuzz of late. Are you worried that a spike in cases could reverse the trend that we have seen here?
Yes, unfortunately that is a question whose answer nobody knows, including the scientists and government bodies which are working on it. The recent rise in Covid cases is a matter of concern. In percentage terms, the rise has been higher because of the low base but absolute numbers still look low.
Open out trades are more opportunities which are trading pops which keep coming and going. They give opportunity on both sides– short side as well as long side. But if I extend my discussion slightly to the medium term impact on the market, I do not think that if the Covid spike happens at all, it would not have as much impact on the market.
We have been through the three waves of Corona and as a result, have learned reasonably well how to handle it. When I say learnt reasonably well, it applies to everybody; it applies to the government bodies, regulatory authorities, the industry, corporates and all the companies have learned really well how to handle the closures, how to handle the lockdown, how to handle the deliveries, how to handle the increased digitalised activities and so have the customers.
As a result, the impact on the market, impact on the corporate performance would not be as much, unless we go to the serious case of the complete lockdowns and things like that which does not look likely. The impact on the market would not be that much, but yes, we are continuing to see weakness in the market for various other reasons of inflation, of global inflation, of the demand weakness that is there. It will continue but these open up trades are more of trading bets.
How would you look at the pharma pack in terms of hospitals, pharma, India-based, US-focused? Which theme would you probably go with right now?
It has been a surprise that in a falling market, a defensive sector like pharma has also been an underperformer. Generally the expectation is that in a falling market, the low betas outperform but that has not been the case. This trend is seen across the subsectors of pharma – whether diagnostics, hospitals or pharma companies including domestic as well as MNCs.
Within this pack, clearly there is a lot of pressure on the diagnostic companies and rightly so.
The pressure on the numbers has been quite visible in the March quarter and are likely to be visible in the June quarter also. However, if the Covid spike sustains, then we might suddenly see revenue going up because of the increased Covid testing and that could be a saving grace for them.
But keeping that aside, the numbers for the March quarter have not been supportive. Also there were corporate actions at a higher valuation but that has died down because the market sentiment changed completely.
The third negative factor is that suddenly the competition has gone up and the rates for various testings have come down significantly or rather lower rates have been offered by one or two competitors putting the pressure on the incumbents and that is where we see that segment clearly not participating. Hospital is something which did try to show some recovery in the March quarter and that is where maybe selectively one can look at buying because the prices have corrected, some of them are performing well and could be investment opportunities so that is the overall take on the pharma sector. Given the correction that has happened, domestic pharma companies could be good investments for the medium term.
We have seen a lot of those midcap cement stocks getting quite clabbered out of shape. Do you sense that it is just the competition news that is making them nervous or are inflation concerns, rising input costs, demand side pressures raising red flags?
The sector seems to have been caught in a prisoner’s dilemma. As it is said, if you behave individually, it is a loss for all of you but if you all come together and behave collectively, it is a benefit for all the players; but that does not seem to be happening.
There are two ways to look at it. While with the Ambuja and
deal happening, there was expectation that the overall valuation for industry would go up. Instead of that, the market temporarily has looked at the sector as an increased competition in the market and that is where we have seen the valuations dropping down suddenly.
Pressure of the results were already there in the sector till about ten days ago. We had seen a reasonably fair correction in almost all the cement stocks – largecap as well as midcap. Because of the pressure of the raw material prices, volume growth has not been as much. The recent fall in the last one week to ten days which has come seemed to be more out of the competitive pressures that are likely to affect the industry. But these are the phases which always come. To the brave, these are opportunities also. Of course, only time will tell whether that was an opportunity or a further loss waiting to happen in the portfolio.
So right now, in terms of the clear call being taken, the sector looks difficult but I would still put my neck out and say that for the medium term investors, some of the really good investment opportunities are available across the largecap and the midcap space where the valuations are almost at a two-year ago level. In some cases, that does offer a medium term investment opportunity.
Another defensive, IT, has also corrected. How would you look at that sector?
Unfortunately, this is a market wherein every sector, every stock is getting hammered if not on a daily basis, maybe by rotation. Today there is cement, yesterday we had IT, the day before, metals and then suddenly there was a rally in auto which again fizzled out at some point of time.
That is something which is happening and given the sentiments are weak right now, the weightage of negative factors is more than the weightage of positive factors. It looks like in the short term, we could continue to see pressure but specific to the IT sector, we have seen 30-40% correction in the individual stocks from the absolute prices as well as the peak valuation that they were trading at.
So if somebody wants to do some buying for the medium term, it makes sense but one has to be ready that with the kind of the negativity that is there in the market, the pressure that can continue in the market short term, one can see some more downside in the prices. But yes, these are the companies with net cash level, high dividend payout, corrected valuations. Growth in the market is likely to be there, pressures on the EBIT could come because of the increased human resources cost that they might have to pay, but net-net it is an opportunity to be gradually bought into.
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