From a messy situation exactly a month ago where it just felt like a terrible time to be an equity investor, now things are really roaring. What a difference sometimes four weeks can make!
Yes, absolutely. If we had this conversation about six months back or maybe at the start of the calendar year and if we had predicted all the challenges that we have seen in the last six to seven months, we would have probably thought that the market would be down a lot more.
If we had correctly said that crude was going to $130-140 and if there is going to be a war between Russia and Ukraine and there is going to be so much of FPI selling, we would have probably come to a conclusion that markets would be down a lot more but versus that we are probably 10-12% off the highs of October 21, which itself is quite remarkable.
It looks like this weakness has been used as an opportunity by long-term investors to buy and keep building the portfolio and adding to the positions. Even a month back, in the kind of environment which was there, one would have thought that it would get a lot messier before it turns rosier. But that is how markets and sentiment are.
Clearly one thing is sure that the macros have been in a way managed relatively better. We have an environment where our inflation rate is lower than what it is in developed economies. The rupee depreciation is a lot less versus the depreciation that we have seen for developed market currencies like that of Japan or Euro or UK.
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On the whole, it looks relatively a lot better than what we could have even imagined and to that extent, it is quite enthusing and going forward, the Street is going to watch out for how earnings play out because this is surely going to be a challenging year in terms of earnings. If the earnings do not go as bad as what some of the macroeconomic variables indicate, we should be fine. I think India as a market should be better than what we are seeing the world over.
must take a slight bit of a detour. It has finally made it to 300, six months back no one would look at this one and look at what it has done in such a short span! It is already at a 52-week high and made it to Rs 300.
Yes, it means it has been a huge outperformer and that is the way some of the bellwether stocks perform. They do not do anything for maybe five to eight years and then suddenly in a couple of quarters, they report a very high amount of outperformance.
But I still think that this appreciation in the stock price has little to do with the underlying growth of the businesses, probably still in single digit but it is all about expectations of corporate actions and there would be demerger of various businesses.
It is those kinds of expectations which I guess are basically helping the stock price to hold up and do better and in fact rise in a market which is down year to date. We could describe this to be more of a margin of safety and all of that and maybe their margins will not get as impacted as what you would have seen for some of the larger FMCG companies.
I would not want to read anything beyond that. It is like a stock you own and then you hope that the corporate actions in terms of demergers and all of that or value unlocking happens as soon as possible.
was a bit of a disappointment and so was . The price collapse has happened very swiftly in just last week and now these stocks are rebounding. How do you treat IT now, are you now playing it for just a trading momentum or a rebound or would you say that IT will recover and this is the time to start buying again?
There are two sides to IT and there are two sides to the coin here one is essentially the business, the business momentum and the growth and the market opportunity for Indian IT services companies and that I think is very much intact. If at all, the size of the opportunity and the ability of Indian IT companies and the value proposition which they have to offer, is surely becoming a lot more compelling than what it was a year back or even a decade back. I have no doubt in terms of the potential and the business momentum and that is here to stay from a multiyear horizon. I remain as excited on IT as I have been.
The other side of the coin is the margins. The margins that we saw in calendar year 2021 or financial year 2021-2022 are probably the best margins that we have seen. I do not think the margins are going to get any better than that, if at all we must deal with an environment that the margins will be lower than the peak margins that we saw in FY21-FY22. It is quite possible that one year forward, the net earnings growth could be a lot more muted than may be what the revenue growth is going to be.
We are going to be in a situation where for the next one year or so may be IT as a sector may not deliver the kind of returns or it may not be able to outperform but I would look at that as an opportunity to kind of find value in some of the established names or find opportunity in some of the lesser tracked names that is the way I would really kind of look at it.
I would clearly use this as basically a buy on dips strategy, accumulate on dips in IT without any material expectations over the next one year or so but I think post that it should be back to business for IT companies, and I expect then the sector to start its outperformance.
Do you think the second half of this year could be distinctly better, things are falling in line for us whether it is on the earnings front or on the commodity front and even on the flow front?
Absolutely, what it looks like is that maybe, we could clearly see all these concerns, challenges, and all of that peaking out maybe in the first half of this financial year or at best by the end of this calendar year. I do expect the markets to bottom out between now and December and that is because I expect some of these challenges to peak out and even if the challenges do not peak, I am quite sure that a lot of policy action would be taken anticipating that it might get a bit more worse and also the fact that maybe the markets itself may factor in all of those impending negatives which might be there on an incremental basis.
It is quite possible that we may come down to levels where things become so attractive from a medium-term point of view that markets may bottom out and along with that what we may see then is basically a case where interest rates may start to kind in a way plateau or fall, FPIs instead of selling start buying and, of course, earnings growth comes back.
Once earnings growth comes back in double digits, the markets surely will bottom out and then the market will continue to inch up. CY22 is essentially a year where we expect things to bottom out and from there onwards in CY23 and FY23, I expect the markets to start its upward journey and the bull market to proceed ahead.
From the recent lows that we had, how did you use that opportunity, what did you buy; for example – you are making a compelling case for IT, TCS was available for less than Rs 3000 a share last week, across sectors what were some of the top picks and buys?
We have used the recent corrections to add to our positions in technology services. I think we have been relatively underweight, but we have used these dips to buy into them. We have added new positions on the capex front.
We clearly believe that the business momentum is the strongest on the capex side so we have used this correction to add into capex positions. Defence is one area where we are clearly seeing a very strong case for indigenisation of the defence procurement and we are seeing several players out there being able to participate in that. Therefore, from a medium term perspective, there is a good amount of opportunity in defence.
Clearly, I think it has been around adding to our existing positions in technology, some new positions both in capex and defence and then, of course, there has been the insurance pack and some of the financials which had, of course, corrected sometime between April to June and we have used these dips to buy into them as well.
How did you exactly play the capex up cycle, are you doing it with banks, are you doing it with the companies that are announcing major capex plans from steel to cement to textiles?
We are most constructive on the companies which are supplying either equipment or components to basically either machinery manufacturers or people who are in a way expanding capacity and therefore incurring capex.
We are looking at companies which are essentially supplying equipment, supplying components, supplying integrated systems to companies who are incurring the capex so that is the way we are playing it. We are not yet playing on the wholesale side of banks. We are not yet doing that.
In banks we are more focussed on companies which are more on retail lending versus wholesale lending, and we are not in any meaningful way into commodities or like steel, we do not have any positions in steel and in cement it is very insignificant on buying up positions. So yes, we are playing it through the equipment and the component guys.
Have your top three holdings changed between January 1, 2022 and July 21, 2022 because the world has changed?
I do not think they have changed materially except for basically the weights going up or down because of outperformance or underperformance. I do not think they have changed in any material manner. The pecking order could have changed because of relative performance of individual positions.
Basically, in our largecap portfolio or in our multi-cap portfolio, Mahindra & Mahindra which was probably not a top five position, has become almost a number one or number two because of the sheer outperformance it has had or Hitachi Energy, which was not in our top two or three positions but is now within the top five because of the outperformance it has demonstrated.
Otherwise, I do not think we have sold meaningfully into any of our top positions. We continue to keep our top positions in technology which is LTTS. We continue to still own it.
Our top position used to be
as well as . We continue to own these positions because we like the long-term structural opportunity that they are addressing.