There is no point in just betting on valuations and expecting those stocks to revive, says the CIO Equity, Kotak AMC.
Would you call the market sell-off ordinary or this is a sign of more pain to come?Over the last three to four months, we had seen synchronous one-way moves across global equities and India was also caught up in it. At the current valuations, with recovery in the economy, we see a couple of factors. One, globally we have seen a bit of volatility on the downside in the last couple of trading sessions. Some profit booking could be happening and liquidity looks a little jittery at this point of time.
The same could happen in India given high valuations and Street expectations on the recovery of the economy. Those are receding day by day and given all this, there is not much room for the markets to go up from these levels. Either it will be a consolidation at around current levels or in the worst case, there could be some correction.
Can I safely assume that what is happening in Nasdaq will have a rub off effect but not the ripple effect on India? Should Indian investors pay attention to the sell-off in US tech stocks or can we say that we are different because we do not have those same nature of stocks?We should pay attention because if market leaders are taking a knock, then that also shows some signs of reversal. I do not think that there is a one to one correlation between what is happening in Nasdaq and our own stock performances in the IT sector. The businesses are very different, the valuations are very different and given the fact that our economy is still reeling under Covid pressure, there are many other sectors which have not come back to normalcy at least in the case of the IT sector. In the overall context of Indian listed space, there is a lot more resilience.
There is a lot more focus on cash flows and they have got huge cost levels. For example, the travel costs have almost come down to zero and those are the levers that will play up during the next few quarters while the revenue side may be still be muted but the velocity of deals are really improving, not so much on the transformation deals but really on the cost breakout engagements with IT users, there is a good amount of velocity. Overall our IT may not fall as much as US technology stocks.
What are the pockets of interest right now from a two-three-year perspective?We are not really taking sectoral calls at this point of time because even within a single sector, the balance sheet strength and the ability to survive this disruption may not be similar. So, we are going more bottom up in our approach but if you were to look at the overall market, there are sectors which have shown more resilience and some sectors which have recovered quite meaningfully from the lows.
Then there is a third bucket which is mostly beaten down stocks and for lack of any other definition, people call it value but those stocks are down in terms of valuations because of a reason. There is no point on just betting on valuations and expecting those stocks to revive but if you see any change in management approach in some of those stocks or if there is any move to monetise some of the non-core assets, then there will be triggers for value unlocking and then we will look at those calls so broadly this is what we are looking at market fully.
Given the strategy that you are approaching markets with currently and the areas of growth, what is the kind of timeline you are giving for things to get back on track?Looking at quarterly results, it does not give any confidence even if you were to look at the possible numbers that would come for the September quarter, it is unlikely that we will have a very different take on the markets or on the stocks.
Overall, FY21 is going to be a washout year in terms of earnings. Currently, the expectations are that FY22 onwards there will be a good recovery in our economy and also corporate profitability. If that were to come through, then there is some money to be made on FY22 basis. But otherwise, markets are fully priced in at this point in time.
Within some of the cyclicals and industrials, there has been a revival story. Where do you think there is opportunity assuming that these are quality stocks with better balance sheets?We do have exposure to many sub-segments of engineering and capital goods. The idea being before Covid, this was one of the sectors which was really attractive in terms of valuations. They were quoting at a market capitalisation of a proportion which was similar to the 2003-2004 period, which was the beginning of the investment cycle. I am talking about the market cap as a proportion to the total market cap.
Now with disruption due to Covid, there has been a significant deferment in most of the projects that these companies undertake. Fortunately for us, most of our portfolio companies do not have much hit on their books and also well run, have good management bandwidth and already we are seeing some gradual restarting of projects and as the execution pace picks up these companies will come back. But whatever has been lost in the last three-four months is a loss but it is going to come over a period of time since projects are restarting now.
The more important point is these will be the set of companies which will be able to really bid for new projects whenever the investment cycle takes off. There is some time before that happens but whenever it happens because of their balance sheet strength and how they have managed this crisis, they will be the ones who will bid aggressively for those projects and also be able to execute them. Overall, in terms of consolidation within the engineering and the capital goods space I, companies that have significant strength on the balance sheets and which have not taken a big hit during the Covid phase, will be the ones to watch out for.
After reducing debt in Reliance Jio, the companys focus is on Reliance Retail which perhaps is going to be the first group entity to be listed separately?There is a lot of focus on deleveraging and on monetisation of all of the businesses which are currently unlisted. So to that extent, there is more to come and we do have a large exposure to the company but obviously we are limited by the Sebi guidelines allowing 10% of the portfolio to be invested in a single stock. That obviously is a challenge because in a market which has been so polarised, if you cannot really take an equal weight or an overweight on a stock which you believe is going to outperform then obviously you have to make that up with some other stocks in some other sectors.
For an institutional investor which has compulsions of a minimum investment, how can you play in the tech space because the only tech idea which comes to everyones mind is Reliance? You may not have direct plays where the technology innovations are taking place in the Indian listed space but definitely you could look at the enablers for that transition. Some of these IT services companies are providing that transition. There could also be business models which are evolving and which are moving more towards the digital side.
If the market is also moving in that direction, then obviously there is significant room ahead. For example, credit card business is something that we really like. Due to the Covid scare, people are using lesser currency notes and spending more through digital payments. Credit cards are definitely one of those businesses which has a very low penetration and that means there is a long runway for growth. Also, if the entire portfolio is managed well, it can really have a very good impact in the business. I think well-run credit card businesses will definitely be one of the areas that we will be keen to invest into.
One idea in the market is that one should stick to leaders whether it is pharma, tech or new age businesses. The second thought is that go on the other end, that is buy beaten down, cheap, high dividend yield stock or a business which is trading below intrinsic value. Would you be tempted to keep a balance or avoid one?You have seen us managing money over the years and our philosophy is pretty clear. We do not like to take extreme positions whether in terms of diversification or in terms of concentration or in terms of some of the sectoral views. So to that extent, at this point of time, while we do have some of the defensive or resilient sectors like IT and pharma, we also have exposure to some of the sectors where normalcy hasnt returned yet. For example, financials and industrials are the areas where we have really not seen a complete normalisation but we do believe that there is going to be normalisation at some point of time. The valuations of the companies we are holding are really reflecting that and hence we would like to remain within that basket. So clearly, it is a balance between some of the resilient names and some of the names where there can be an upside because today things are still uncertain and you really do not know which way the market is going to tilt.
In case the recovery is going to be delayed, then you have to have the stability in the portfolio with resilient sectors in place. At the same time, if the recovery starts to gather momentum, then you need to have something in that bucket as well. We have always been approaching investments from a slightly conservative or middle of the road kind of an view and that is what we are doing in these uncertain times.
Read the rest here:
Indian IT unlikely to fall as much as US tech stocks: Harsha Upadhyaya - Economic Times
