What are you expecting from the entire consumption basket because so far the results have been better than expectation?
I am really positive about this space going forward. One of the best places to stay invested in is FMCG – whether it is
, , or Nestle.
The reason I say this is because most of the companies have reported very healthy growth in the top line; the revenues have grown quite sharply but the net profit has not grown in line as a percentage as it should grow historically based on that kind of top line due to higher raw material costs and higher inflation. In this scenario, where central banks around the world are trying to control inflation and raise interest rates, these companies will not be impacted that much by interest rates hikes because they operate with no debt on their books.
But if they can control inflation and raw material prices can come down, the likes of Nestle and FMCG companies in general will do better because there will be a significant margin expansion. I expect that to happen over the next three-four quarters.
What about the auto pack? Look at the kind of commentary that has come in as far as goes and also has seen a disappointment on the margin front?
Yes, most of the auto stocks and Tata Motors in particular have run way ahead of their valuations. People talk about what the stock has done in three months or six months. In July of 2020, the stock was trading at Rs 120-150 odd levels. It has run up 400% from there and the big reason why it ran up was because there was this talk about them being the frontrunners the first movers in the EV segment and they have this big fleet of electronics vehicles hitting the markets.
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All of that is true, but as we saw yesterday, right now the revenues are significantly impacted by what happens with JLR and their overseas operations. The domestic business has done well but the way the stock has run up, I do not think the growth in their sales numbers could sustain this move. For now, this stock should be completely avoided. It is not a bad company. In the next six, eight, 10 years, it should do very well. But even if you had a long term view, a lot of these auto stocks are extremely overpriced now.
What about the entire IT pack? The moves have been really volatile. We see a spurt one day, then the next day there is a huge decline and today we hear Cognizant has cut its guidance as well as the Q2 performance was a tad bit mixed. How are you looking at the entire IT pack and is there a preference between the largecaps and the midcaps?
I am not looking at the IT pack any differently than I am looking at most other sectors. A frontline IT stock like has run up around 300% in the last two years or so. The price at which Infosys and are now, it is only logical to expect them to correct. I do not ever look at IT numbers and the commentary very seriously because unless something drastically changes with one odd company, the commentaries remain the same across the board.
In Infosys, quarter to quarter, there is either 1% or 2% revision in the expectation going forward. Nothing changes at the fundamental level for these companies, particularly Indian large IT companies. I do have a preference for largecap Indian IT companies. Infosys has been one of my favourite stocks. I have it in my portfolio and have not sold anything there. I do expect the stock to do very well going forward. In the next six to eight years, this will be one of the best performing largecap stocks coming out of India and the reason is very simple, they have a lot of cash on their balance sheets to expand and acquire companies.
Indian IT is definitely going to be one sector from where a lot of global companies are going to come out from. I expect IT to struggle for some time. I was reading that in an environment where interest rates are going up, a sector which gets impacted a lot is a sector which does not have any debt on its books, which is IT. The reason for that is while finance and interest costs go up for a lot of other sectors, the order flow for IT companies reduces because their top clients, whether it is financial services or healthcare, have lesser spending on technologies as they reduce their spending there.
So while it is not directly impacted by rate hikes or interest and liquidity, free availability of money indirectly does impact them in the short to medium term. For me, the short to medium term is about one year, during which there will be some impact. There will not be any significant growth in this sector but again there is no problem with largecap IT stocks in India. One should definitely hold them in your portfolio and gradually look to add them.
Given that Policybazaar is making into the 52-week low list every other day and we are also seeing what is happening with another platform stock Tanla, how are you approaching all of these platform companies?
About 8-10 months ago,
was trading at about Rs 140-150 odd levels and at that time I said I do not understand these modern day IPOs and I will take both these stocks one by one in the same order in which you mentioned them. has corrected around 70% from its top and today it has a market cap of around Rs 46,000 crore. In the Indian listed banking space, there are about 12 odd banks in the PSU space, around 24 odd banks in the private banking space which are listed, now at Rs 46,000 crore. Paytm is bigger than 10 of the 12 listed PSU banks, barring only and . Even in the private banking space, it is bigger than around 18 or 19 of the entire pack of private sector banks that are listed. Ask yourself is this Rs 46,000 crore of market cap justified? ,
I think it has a lot to do with a lot of hype which Paytm created. It is a product which everyone has on their phones, particularly in urban areas and cities and now even in rural areas. So there is a lot of mass connect for this app and for this Paytm is a brand and that is the only reason why a lot of retail got into this idea. Otherwise, if a stock has corrected 70% and is still larger than most of the PSU banks barring
and Bank of Baroda and around 18 of 24 private sector banks, why would you not recommend buying it? The truth is they do not have any business model other than the fact that everyone is brand aware. However, there is no real way that they can earn big revenue.
It is the same case for Zomato and my reason for not being invested or not recommending Zomato today is the same as it was when it got listed. This company has zero promoter holding meaning there is no clear promoter; stock options have vested in all the employees which they got at one rupee a piece and they are going to convert all of that and sell in open market at Rs 41 as well. It is actually a great price that they are getting and again this company has a robust network of delivery guys and stuff like that.
I do not see how and I am not concerned about how they will make money. Since their IPO, they have gone on and on about expansion, raising more private equity, raising more money and expanding. This is a business which has continuously spoken about expansion, expansion, expansion and has not delivered. Forget delivering profits in a single quarter, they have not even improved on the losses. So I do not see how any of these IPOs other than the fact that the brands that are associated behind these stocks are great in terms of their brand equity. I do not see how on paper, on balance sheet or on income statements, there could be revenues unless they do something new or a new vertical comes up. They are going to continue to struggle.