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Has the time come to buy or are we reading too much into the last two days’ rebound?
The last two days of rebound came after a significant correction in the markets, particularly the last two-three weeks. Second, be it the US or India, the way interest rates have gone up, there seems to be a clear strategy now to match the demand and supply and control inflation. Consequently, some correction has happened in metal prices, crude prices, palm oil, etc. Now, that is actually pinning hopes that India is more like a domestically driven economy in terms of demand. As global commodities cool off, India could be at an advantage whether it is crude or other inputs.
So to that extent, if the commodity prices cool off, it will be beneficial to India but as of now, I would look at it more like a technical bounce back after so much of correction and we need to see how things pan out because there is still uncertainty over monsoon. It was down quite a bit in the first three-four weeks of the season. In the long term, things are fine but in the near term, turbulence can still be there.
Since you are saying that we are seeing a technical bounce and the team suggests that it might be time to look at the domestic stories, how would you like to play this theme? What is the portfolio strategy at the moment?
As far as the portfolio strategy is concerned, we have been overweight on three-four sectors. In a recent strategy also, we have been significantly overweight on auto, banks, capital goods and IT services. These are the four sectors we are overweight on and the rest of the sectors we are equal weight or underweight at this point of time.
You are overweight on auto. Which are the pockets that look good in that particular vertical?
Commercial vehicles are doing well from the past couple of quarters and in the last two-three months in particular, rural demand particularly on the two-wheeler side, has also been good. So, auto is one sector which was actually not doing well even pre-Covid. Now we have got two-three years of pent-up demand because last year also the demand got impacted because of the semiconductor shortage.
Now as the situation stands, the demand is reasonably good, the commodity prices are correcting and if the semiconductor issue also gets resolved, there could be broad-based recovery on the auto side. In addition, in the commercial vehicle space, we are positive on M&M.
Where is it that you find value now in autos?
The sector is quite complicated and a lot of technology changes are happening. As far as the EV side is concerned, one segment of the industry which will get impacted the most over the next few years will be the two-wheelers. So to that extent, in two-wheelers, one can remain a medium term trader. But at this point of time, commercial vehicle is one clear space and if you want to look at pure play commercial vehicles, then is the stock where volumes are good and where the company has been gaining market share.
There is a good potential in Ashok Leyland to move up from here because the cyclical recovery is also underway in its case. In M&M, for example in tractors as such, it is more like a period of cyclical downturn. But this time around, the rural income has been good, farm prices have been quite firm. But more importantly the M&M has had a drag from its PV or the utility vehicle business which has not been doing well over the years. So of late, the kind of launches they are doing and the likely pick up over there is going to be the major driver for M&M. As the commodity costs soften and the PV business picks up, M&M could be an interesting stock to buy.
Where within the large private banking plays are you finding value? Or would you still stick to the top rung?
Banking is one sector where the price to book value of all the major players, barring a few cases here or there, is lower than what they were on a pre Covid basis. In this kind of scenario, the interest rates are rising and in the current context, the asset re-pricing of banks will happen at a faster rate than their liability re-pricing. So we will see NIMs expanding and profitability improving for the large banks and frontline private sector banks will be gainers in that.
The sector is also going to witness a lot of competition, a lot of changes as far as RBI is concerned. We advise sticking to the frontline banks like
, and . One will have a slight bit of waiting time because of the impending merger and in PSUs case, it is . Our call definitely is stick to the frontline banks.
You spotted IT as one of your top sector bets, but that does not seem to be playing out on a year to date basis?
Currently what people are thinking is that if the demand slowdown happens in the US or recession happens, then IT companies will suffer. However, if you look at the history of this sector, over a slightly longer term, one needs to look at two factors; one, the hypothesis of the US going into recession. First of all, it might play out or it might not play out.
The second is what sort of work Indian IT companies are doing now for their clients, which are based in US or elsewhere. It is value added work which not only helps them run their businesses but also helps them a lot in the cost rationalisation and technology upgrades. So while yes, if there is some pressure there is some realignment here or there can happen but in the longer term, the business will be there and all these companies will continue to grow.
If you look at the last 1.5 years, particularly post the first Covid wave, the IT companies had a very strong run because the PE rerating for these companies happened because there were hopes that work from home and lesser costs are something which are going to stay but that is changing to some extent.
After that massive rerating, the PE multiples are now retracing. But having said that, this is all a temporary phase. Indian IT companies will continue to do well and one should look at the companies where the PE multiples or the stocks have already seen meaningful correction. But in the past three, four months, midcap IT companies have started trading at significant premium to large IT companies.
A company like
has seen significant correction to the current levels. I think it is time to look at those companies with a one or two-year kind of a view.
From the broader midcap IT basket, what are the names that stand out?
When it comes to the midcap IT basket, one has to look at the domain in which they are operating. Look at the kind of digitisation, engineering design services and entire changes which are happening in the auto space. LTTS is a very good play on that.
As far as the midcap IT is concerned, I would look at only very niche companies as of now and I will prefer the largecap IT space.
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