It is turning out to be a good morning. Last week, we saw a strong rebound. This morning, it has started well. Do you start buying the market now?
The market got sold out significantly and a bounce back was imminent now. The texture of the bounce back and the kind of stocks participating is changing and that is what investors should keep into mind. Sectors like capital goods; autos, especially four wheelers will be the preferred sectors for me and I believe that these sectors will continue to outperform and investors should keep on allocating here because for many capital goods companies in the last 18 months, especially the ones which bid at fixed price, it was quite devastating because of the way commodity prices – steel, copper, aluminium, everything went up.
Now many of these companies have good order books and the same thing works on the flip side. This year, the earnings growth could be very strong. I think that is where people should start focusing.
With the exception of crude, every major commodity – sugar, coco, wheat, rice – are down. Even copper and nickel prices are down. How will that translate into a move for FMCG companies – be it a biscuit maker, a cigarette marker or a snack maker?
For consumer facing companies, it will be a mixed thing because volumes are under pressure. So on one side, volumes are under pressure and because of that, many of the FMCG companies on the last round raw material price hikes actually did not increase their final product prices so much. This moderation is obviously a welcome thing. But whether it will add to their margins or benefit them in the near term is tough to say. Only results will show.
But some of the companies showed outperformance in terms of operating margin performance even when the input price pressures were severe. For example,
could actually see better performance coming through whereas, I am not sure about a lot of the other FMCG companies because the market demand has come under very severe pressure and we need to watch the space as many of these companies still trade at very high valuations.
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Mahindra Group is 10% of your holding. Are you looking to hold on to your 10% holding?
Yes because the company will actually do very well over the next two years at least. This year, many of the auto companies starting the second quarter onwards will see significant tailwinds because of input price pressures wearing off and on top of that, if they have a good product pipeline and volumes are good, then that company should do very well.
The good part for M&M is not only their new product cycle – which includes Thar, Scorpio, XUV700 – are doing well, they are taking initiatives on the EV side also which was a big concern for legacy auto companies. The tractor segment is outperforming the rest of the industry and gaining market share and that is one segment which could do well. The spoiler there is if monsoons do not do well and farm incomes are not so great, then some pressure will come on the tractor side and that is something we need to watch out for.
Today, there is a crucial board meeting of Bajaj Auto. The market punished the counter the last time the buyback proposal did not go through. Where do things stand as far as goes and would it be your pick when it comes to the two-wheeler pack?
It was very strange the way Bajaj Auto did not take a decision last time because a board meeting should be called ideally when the decision on the management side has been taken more or less. Then it only depends on the quantum of buyback and the mood of the buyback. The market did not like the fact that it was postponed. In this board meeting, they will probably announce the buyback for the second time. They cannot have a scenario where they again say that we are not going to do it.
Bajaj Auto has done well in the export market because many of their export geographies are crude oil producing companies and those markets have been doing well for them. Domestic markets for two-wheelers are still under pressure and that is the pull which is there. As reopening happens, the three-wheeler demand could come back and that is a high margin product for them.
So, on balance, things are going well for them and Bajaj Auto did not fall as much as many of the auto companies. It has been quite resilient as a stock. I would think that it is a low volatility stock. Depending on the contours of the buyback, it should do reasonably well, I do not see a huge upside in two-wheelers at this stage because domestically.on ground demand situation is not very good.
The other interesting bit now is this old debate between should you buy consumer facing companies because commodity prices have come down or should you revisit commodities because the basic scare on inflation is not over?
Commodities saw a hyped up move based on some super cycle assumptions which were never going to play out because there is no super cycle in commodities as there is no super cycle in economic growth. So supply constraints led to huge rally and then it always leads to excessive stocking by companies, etc, because of the fact that people are not sure of prices in a month’s time. So many companies which used to keep one month’s inventory, started keeping two months’ inventory.
On the flip side, the opposite happens, destocking happens and then people wait to buy and that is the cycle which will play out. Economic growth prospects globally are not so great. Higher interest rates will moderate growth in many western economies. The Chinese economy is in the dumps. So unless you are a trader, there is not much ahead for an investor. Trading is possible because if a commodity stock halves from the top, a 10-15%, 20% up move can happen and that is a play people can go for, It is not a long trade also. Longer term, the commodity super cycle was just a myth and I do not think it is going to play out.
What is your calling when it comes to the defence stocks? We have seen a reasonable correction in the defence stocks.
Many of the defence stocks will remain buy on dips because the visibility of growth is significant and also the fact that the order flows over the next few years will only keep on accelerating. They would not decelerate because the recent Russia-Ukraine war etc. also has shown that we need to have reasonable domestic ability across the board. Otherwise, we could get constrained if some issues come up. These plays will remain strong and so on corrective moves, many of these companies should be in the portfolio of investors. What percentage they want to keep can differ but at least 10% across two-three stocks is not a bad idea.
Outside of the pool of financials as well as autos, what else could chip in sectorally in the market rebound if it were to last long?
If the rebound lasts long, then obviously all the beaten down midcaps, small caps will start participating and I think it could become more widespread but I think the preferred bets have to be the users of commodities for now and I would think that where we could have relative avoid should be broadly commodities although bounce backs cannot be moved out and technology where I think slowdown in demand and margin contraction is coming.
On the sidelines of the 41st AGM, the kind of commentary that we are hearing from Infoss saying that they have seen growth across all geographies across the board. They have also increased their hiring by over two times in just about two years, saying that they have a very clear view on the levers which are going to drive their high margins going forward. But IT stocks were the sole losers on Friday. Why is that?
Technology company management just react to the market. They have no idea beyond a couple of quarters on what is going to hit them and many times discretionary spending cuts are very sudden as demand drops off.
For example, this is playing out in many of the textile companies also. The retailers were doing so well in the USA. There was a huge demand for outsourcing and suddenly many of them have started cutting estimates big time. Demand has come under pressure and we have seen a sell off there. That is how the US economy operates; sudden decisions are taken as profits come under pressure and cuts are made.
IT spending in many areas tends to be discretionary. Some are strategic and that continues but discretionary spending gets cut and that is where pressure will be built. I think anyone is very heavily overweight on technology even now. People should keep on trimming positions and adding elsewhere and whenever the rally happens.
E-commerce has taken off and more and more penetration is happening. Having said that, this is a crowded space with both listed as well as unlisted plays. Have you looked at the Delhivery model closely?
Yes, the key is that when they are continuously coming out with new offerings with faster delivery cycles etc and expanding to new cities, what that does is that it puts more pressure on profitability. So that is a challenge for most of these companies which have been formed and there was no pressure on profitability till they were unlisted.
The challenge is how do you transform yourselves into public limited companies where profits matter and that is the key thing I will watch out for. I do not think the stock is cheap at Rs 500 because the visibility of profit at least for two years is not so great and we need to see how they transform, how they get profitability back on the plate and then we will evaluate. It is not a company which will be completely avoided. It should be under consideration but at lower prices.