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Today’s volatility apart, from the June low it has been almost like a joy ride. It has been one way and there has been a recovery of more than 15% plus. Are you surprised with the market recovery?
Somewhere in June end, we were forming the view that there would be a change in narrative in the next four to five months and the change in narrative would be peaking of inflation and peaking of interest rates. To our surprise, it just happened in 20 days time and from mid July, we saw that markets have started reflecting that in the second half of this financial year, probably inflation trajectory will be far lower and hence interest rates will follow downwards.
The market has taken that in stride and that has taken us a little by surprise. Also the FII selling had a role to play. In the last eight-nine months, we saw more than $30 billion of FII selling. From mid July, once the global market started participating and rallying, we saw the intensity coming down and in August they have turned buyers. A combination of both have led to the rally that we have seen but as we speak today, the market is clearly at the upper end of the valuation range and we believe that in the near term, there is very little upside and one needs to be clearly having a stock specific approach to this market.
In the beginning of the year, the market set up was different and there were a lot of IPOs. There was a bit of a euphoria in terms of what was happening in the fintech space. IT was in a booming patch. Now, different IPOs have dried up, fintech companies’ promoters are admitting that they need to be profitable and there is a 20% decline in IT. How would you look at that end of the market?
The froth has been taken out and people and markets are realising that staying in a private space is a different ball game and the innings which they play in a public market is very different. So all these new age companies are learning these lessons.
The correction that we have seen in the IT sector is not on a standalone basis. In the first quarter, there was pressure on margins and what we are picking up from global cues is that if global growth is in question, at some point of time it will reflect on the demand for the IT services.
From the second or third quarter onwards, our belief is that management commentary of most IT companies would start cautioning us that the demand environment has started to slow down. From whatever cues we are picking from US companies, some are hinting towards a cut in IT spends and with lag, it will reflect in the commentary of most of the IT companies as we move into the second quarter and third quarter.
So our stance currently is to stay underweight, probably one more round of derating is still there. In the midcap IT space, the valuations are still not comfortable. They are still above average and probably after one or two quarters, we will get an opportunity to relook at the sector again.
What is your strategy when it comes to IT? Reports are coming in of and delaying variable payouts. So in this set up, will banks be the big winners?
Yes that has been one sector where we have been positive, especially the private sector banks. We believe that there has been a time correction on the valuation side. Earnings growth is picking up, provisions are at all-time low and barring this quarter, where a part) was impacted because of MTM losses, credit growth bodes well for the entire sector as a whole. Do not forget that in the early part of rising interest rates, NIMs are impacted favourably for banks and we believe that for the next 6 to 12 months, banks could be in a good position.
In the Q1 of FY23, banks reported very strong earnings growth and a large part of earnings growth in Nifty was driven by banks. So this year could be a very strong year for the banking sector and with FIIs selling slowing down, this sector could see an upward trajectory.
If one wants to take advantage of this trajectory, what should one be looking at? gave phenomenal returns in 2021; Group is still playing catch up, ICICI has been a star? Other than private sector lenders versus public sector lenders, there are also big opportunities that one sees with the catch up of the mid tier banks?
We stay put in the large private sector banks and a couple of names on the PSU side. That is the way our portfolios are positioned. From a medium-term perspective, market share gains are moving from PSU to private. At best, the PSU banks ex of the leader would be trading bets not structural bets. We are still finding it difficult on the tier-2 and tier-3 names in the financials.
In NBFCs, the entire space is now being dominated by three or four names, most of them in largecaps.
In the mid tier banks, clearly there is a challenge on market share and a clear challenge on growth. So the choice is very limited in the tier-2 and tier-3 names but the preference is for large private sector banks and selected PSU names.
Also, apart from financials, there is one theme which we are positive on. This is a structural theme where we have a 3-5-year opportunity and that is the manufacturing sector. After a long time, when we are interacting with companies and leaders of the space, they are optimistic about the growth story and it is not only the domestic growth, the export part which is playing a big role.
We all heard about China plus one and how it is impacting and benefiting us but the next big driver which has been there in the last six months because of energy prices in Europe is the Europe plus strategy. When we speak to industrial manufacturing companies, when we are speaking to auto ancillary companies which require skilled manpower, do not forget India is a hub of shop floor engineers and that is a big trend and many sectors are definitely getting impacted positively.
We recently were speaking to a few auto ancillary companies. They said that they used to go to the OEMs and it used to take at least 18-24 months for product approvals. Now OEMs are going to ancillaries and saying these are 100 samples, how many of you can manufacture and give us in the next three to six months? I think the order has reversed. If we play our cards well, the next four, five years of manufacturing could be very positive for the country as a whole.
If we could sign four or five FTAs (Free Trade Agreements) in the next couple of years, India can become the manufacturing hub for Asia apart from China.
Where else are you seeing such opportunities? I believe home improvement is another segment that you like. Where within this pool are you finding newer opportunities that one can still buy?
Our preference lies in the entire real estate cycle towards home improvement. We believe the cycle has just started. It has been one, one and a half years, we believe that there are at least three to five years more into the residential real estate up cycle and the way we are playing is that not through developers, very selective on developers but more through the entire home improvement sector.
Do not forget when the elephant starts walking, it impacts the 200 industries around it – be it cement, tiles, plywood, mattress, consumer durables, wires and cables. So that is a very large sector and the good part about it is that we have leaders in every space. So whether one talks about tiles, plywood, mattress, consumer durables, consumer appliances, cement – all are good quality companies with decent ROE, decent balance sheet and cash flows and leaders in their own space.
I think this is one space where we think it could be a structural, 3-5 year opportunity. In between, we will get blips sometimes on demand or on margin but structurally speaking, these B2C businesses are looking very good from a three to five year perspective. Most of them could be played from the mid and smallcap side and most of our portfolios are positioned accordingly.
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