There has been quite a bit of pick up when it comes to the auto stocks but is there more upside?
Yes, I think the rally has just started in auto. For the last five years, auto has not performed. I think 2017 was their peak. From 2018 onwards, we have seen a lot of changes in insurance regulations, in registrations and the cost of ownership had gone up substantially and there was a lot of demand destruction for all these auto companies.
So from 2018 to 2020, that problem was sustained and then we had pandemic and after the pandemic, they had a problem with semiconductors and availability of raw materials and supply chain disturbances. It is now that those things are getting out of the way and the sector has started performing and demand is also coming back now.
We have seen that in month on month auto numbers, where pretty much in all segments they are showing rise – somewhere a steeper rise, somewhere relatively less. But there is an increase which shows that the trajectory is now upwards and probably the peak profitability which this sector used to have since 2017-18 and had dwindled to almost 50% or less, will probably come back in next one year.
So autos is an area where one should definitely be positioned now. Some of the stocks might appear to have moved up but I think there is a lot more potential there. We are quite bullish on the sector. Just for disclosure, we have some auto stocks in our portfolios and we have just added to this. We have Eicher in our portfolio; before that we had
. We have Maruti. We have some of the auto ancillaries like Sona Comcast and we are quite exposed to this sector now.
« Back to recommendation stories
What about the entire FMCG basket because a lot of headwinds in terms of raw material prices are now turning into tailwinds and could help up the margins for some of these companies. Would you concur with that view?
Yes in near term, it will definitely help because a lot of these raw material costs had gone substantially higher. They are down from those peak levels although they are not back to the starting level. Palm is down 30-40%, wheat is down, sugar is down. All these things are going to help these companies and in the meantime, most of these companies have taken price hikes. So it is a double benefit – price increases as well as cheaper raw material costs will come to them.
However, one has to understand that in a rising inflationary environment, and rising interest rate scenario, consumption gets hit substantially. In the longer term, what will drive these companies’ earnings will be the volume growth and actual demand for products. Yes, in the near term, we might see the stocks performing because of that but one has to be cautious about the irrational exuberance here because these stocks are never cheap and there is not too much margin of safety.
Secondly, there will be a question mark on sustainability of growth because ultimately, it all depends on demand and if people’s disposable income goes down, then consumption gets affected.
We have two stocks in our portfolio; one is DMart which is in our longer term portfolio and the other one is
. It is one of the most profitable companies in the apparel segment and it has been growing its studios. DMart is a beneficiary of cost efficiencies and store efficiencies. It is also a beneficiary of the inflationary environment where people every day look for cheapest everyday purchases.
This is a week when we saw , , and even the likes of and Birla Soft at 52-week lows. Did you buy any of these stocks?
In our portfolio with 2-3 year horizon, we still have
and Wipro but we have stopped increasing exposure and giving to new clients for the last three, four months mainly because we thought Wipro probably will lag behind its peers for some more time and so it is better to wait. I think that has played out well. Wipro has taken a very big beating also.
The point is that if somebody is looking for two, three years down the line, then these stocks are coming at an attractive valuation but at least for some time, I do not think they are going to perform. We follow this cancelling model or William O’Neil’s theory is the basis of all of our portfolios. A very important fact is for any stock that performs, 50% of the performance is driven by the sector performance. So if the sector is in trend, then chances are that the stocks will also perform.
If the sector goes out of favour, even though the company might do well, very rarely will you find that the stock will outperform the market or outperform the sector. So keeping that view in mind, we have moved out of IT for quite some time. Last August-September itself, we had started reducing and by January, we were almost out, except for Infosys which is still there and that too for the longer term portfolio.
We are totally out of midcap IT. The idea here is that because the sector is out of favour, chances are that even stocks like
, which yesterday came out with a good set of numbers, went down 4%. If they had come out with these numbers last year, the stock would have gone up by 5%.
So, there is a clear sector rotation happening, people are moving out of IT and moving into FMCG, autos. Most of it is going to autos. If that is happening, it is probably better to reduce exposure to the IT sector.
What is the outlook on ’s numbers? Goldman Sachs says that the steep rise in the pet coke prices really hit their P&L. We saw that play out in the numbers. It was a huge miss due to the higher fuel cost. Will we see it play out for cement companies across the board?
Yes, definitely this will be a concern and to go by ACC numbers, other cement companies should show similar or even worse results. We all know that in this quarter, cement prices have not gone up at all. In fact, in some geographies, there was a cut in prices and on the other hand, the input costs have gone up substantially. Coke traded at $500 a ton at one point of time though now it is $240 a ton. But for those three months in that period, power cost was very high. So I think there will be a substantial dip in the margins of all these companies.
We have a very positive view on India’s capex story over the next two, three years. Obviously cement is a beneficiary of that but in the near term, because cement is a commodity and obviously the pricing will play a very important role there.
Therefore we are keeping out of cement stocks as of now. We do not have any cement stock in our portfolio though we are playing this theme through real estate. We are positive on real estate. We have a few companies in real estate like
and Brigade in our portfolios.