In the latest commentary that has been coming in, some of the numbers are perhaps not looking as grim as was anticipated. Maybe that is also helping to bring some stability back into the markets after a couple of days of lull. UltraTech for instance was up 7.5% Yesterday.
Yes, clearly the market is looking at sequential recovery. Everybody knows that there is no point looking at the year on year numbers because they will obviously show a de-growth. The question is how soon and how flexible we are in being able to recover from the April lows? April was the worst month and from there, we have clearly seen a sequential recovery in May and June. Then came the question whether the sequential pick up was on pent-up demand and whether it will sustain or not.
If we listen to the quarterly analysts’ calls, for most of the companies they are saying that in the 20 odd days of July also they are seeing a reasonably sustained growth. Of course, the industry factor, the seasonal factors, the monsoon factors — all those standard things will play out over the year. So that is one thing. The other thing is clearly the tailwinds of lower costs playing out for example in cement. For the whole cement industry, the lower cost factor was a play in the March quarter and proved to be quite beneficial for the whole industry. It has continued to remain beneficial for the industry in the June quarter also. At the same time, surprisingly, there is no drop in the realisation per tonne. In fact they have gone up. So these are the factors we are seeing.
On the other side. if we move beyond the fundamentals or the recovery side, there is clearly money flow continuing in equity. In the initial part of the Covid led developments in April-May, we did not have as much inflows coming in from global institutions. Now of course, we are having that also. At the same time, since the money is going into the other asset classes like real estate, fixed income etc, I think part of that money will be coming to equities as well.
The under-ownership is another part. There was a concern that because of the economic slowdown there would not be equity market participation but people clearly see that the market has moved on its own and if we do not participate, we will continue to be left out. In fact Tuesday’s rise is another proof of a further left out feeling. All these things are coming together and are leading to the overall buying interest continuing in the market.
What would be your preferred play in the banking sector?
My preferred play in terms of slightly expensive stock will be Kotak Mahindra Bank. The stock was leading the banking Nifty up on Tuesday besides one or two others and in terms of less expensive stocks, it will be ICICI Bank. Both the banks have reported good numbers. ICICI Bank numbers unfortunately were followed by some correction in the market so we could not see that much of a positive impact coming in. We should hopefully see that now.
Kotak’s results got followed up by positive sentiment in the market or maybe Kotak’s results have turned the sentiment positive in the market whichever way we look at it. So the stock is up. So these are the two good bank stocks. As I said, the results have been better for not only these two, in other private sector banks also, the asset quality risk which was being perceived by the market has proved out to be much less. The moratorium assets are under control.
Coming to Kotak, the CASA growth clearly shows that the money inflow is continuing. They have intentionally de-grown or gone slow on the advances which on Monday in the call, Mr Uday Kotak said that post 30th June they have gone reasonably aggressive in credit guarantee scheme for lending to SMEs and MSMEs. So, that growth will be visible in the September quarter numbers. Overall, the indications are towards a positive side and that is the reason.
How you are looking at the financials? How have you looked at the overall valuations and where do you stand when it comes to this space?
One, in terms of the participation in the rally in the last three, three-and-a-half months post the March low, there was an initial spurt of participation by some of the sub-sectors of BFSI but not as much participation by some other sub-sectors. Another point is over the years, the whole BFSI section has grown with too much market cap, too many opportunity and in terms of sub-sectors, if I compare today’s BFSI to let us say about five or even four years ago, the whole space of microfinance companies was not available for investing at that point of time. Today it is available.
I am not recommending anything but I am just trying to compare. The space of asset management companies for investing was not available earlier. The space of insurance companies — both life and general — was not available till three-four years ago. Even small finance banks were not available. So the only things that were available were private sector banks, public sector banks, old generation private sector banks and some of the NBFCs.
Of course the number of NBFCs that have got listed have also grown in the last few years quite significantly. I am not concerned about the sector’s performance and I do not see any stress in the sector as a whole. Of course, in any market, in any sector there will always be laggards given the way things have shaped up. Some smaller companies, more from the NBFCs and the home finance side, are the ones that could suffer. Public sector banks have always been a no-no for me. So while we have seen some recovery from the lows in the last one, one-and-a-half month, if we look at the year till date number, the public sector banking index was down at that point of time about 40%. The biggest fallout in all the other sectoral indices and not only in the year to date, even in the last two, three, four, five years, the public sector banks’ performance has not been anything to write home about. The investors have continuously lost money. So that continues to be a no-no, otherwise we continue to see opportunity.
We generally do not talk of insurance companies. These have been a clear outperformer in the last two-three months’ market movement. While the private sector banks have not participated, they continue to be good investments. But insurance companies as a pack also is a very good investment opportunity. In NBFCs, the buying interest has shifted and will continue to remain towards the larger, more liquid and better managed companies compared to the plethora of NBFC IPOs and the listing that we have seen recently.
It would be interesting to see what ARPU numbers Bharti delivers. This is the quarter where telecom companies have made hay during the lockdown and of course the commentary on the AGR dues etc is something that we are going to be looking out for. What according to you is most critical from the Bharti management in their earnings commentary?
In my view, one or two things that are critical — the ARPU growth numbers. I do not think that number will show a very significant improvement but any talk about the management on the likely trend, what possibility they see or pricing power coming back to the industry, whether they will be able to raise further rates or not. Another important point will be the data usage. We know that because of people staying at home, data usage has clearly increased. Whether it actually reflects in the numbers of the telecom companies, particularly Bharti or not will be the another key thing to be watched out for. Telecom subscriber numbers of course become available on a monthly basis so there will be no surprise there and the AGR dues commentary is an ongoing issue with the Supreme Court available online. So again, there also nothing much would be to be watched out for.
Even in the terms of debt, cash, cash flow position, there is nothing critical to be watched out for but these are the two things; The data usage number will be a very important point to be watched out.
Mahindra & Mahindra is up about 4% odd or so and Maruti is still up ahead of numbers. The entire auto pack is up 4%. Is this just some kind of buying at lower levels across the auto names because apart from an Eicher, or even an M&M. on the back of the rural thrust we have not really seen any other major reasons for this kind of pickup in some of those auto names?
Yes, you are right. What tends to happen is that if the market continues to remain directional, whether on the upside or on the downside, to sustain the index movement and to absorb the money inflow that is coming into the market the money that is coming in has to keep looking for opportunities. In a shorter term, the money goes into sectors or stocks which have not participated recently.
That is where we keep seeing sectoral rotation either on a daily basis or on a two-three day basis or sometimes on a weekly basis. So clearly that is one point. Suddenly automobiles seem to be back in surge, IT is back in surge. Last three days, banking was not participating. On Tuesday, there were signs of participation and that might continue.
As I said, when the market takes a direction, money either keeps coming in or going out. It keeps looking for that shorter term opportunity. Having said that, an agri related automobile demand pickup is quite visible and that could be one of the reasons that we have some buying interest continuing in the agri related automobile stocks continuing to be there although with every rise, their valuations stand to become expensive. The whole question of whether the demand sustainability will continue or not, in case of agri — the market has more confidence of sustenance because it is not being seen as a pent up demand, it is being seen more as a rural recovery and a good agricultural production backed demand.
What is the outlook on telecom? Just today a Goldman Sachs report indicates that they continue to prefer Bharti Airtel over Idea. In fact, they have downgraded the Vodafone-Idea stock. What is your outlook within the telecom space? How are you looking at Reliance Industries as well and how are you reading into the downgrades that we have witnessed?
Speaking about Reliance Industries fortunately or maybe unfortunately it has become a very simple trade that just invest and forget in the short term, leave aside medium and long term, medium and long term it is always that kind of not trade but an investment so that has become the case even in the short term. Now how long that will continue looks difficult to predict as we all know we had a low of around March 15th from there it moved to 1500 and everybody felt that okay it has doubled so now the story is over, from there it moved to 1700 the same feeling came then it moved to 1900 same feeling came and today we are at 2100 odd and nobody knows. Of course one point will come wherein it will peak out and maybe either consolidate. Consolidate it has tried to do maybe for a shorter period of time hardly one day or two days or three days even now also but it will correct so difficult to predict.
In terms of downgrades it is natural for analysts that if something keeps moving you become safer by downgrading it and vice versa that if price has been coming down and if the company is doing well you become safer by upgrading it. So I would not read much into it. In my view right now it is very difficult to take a call on the price movement and valuation of the Reliance Industries. As of now, it continues to look that buying interest is continuing and may continue for the time to come.
You would not be brave right now and buy into an InterGlobe Aviation or for that matter PVR or an Inox because there is chatter that perhaps multiplexes are set to open by next month, although it is going to be left to various states to take an individual call. Do you think investment wise this could be a contra call?
One word answer to your question is as you rightly said it is no.
A good comeback just when we thought the market was steadying. What do you feel is in store?
You are right and this has happened multiple times in the last four months of almost a one-way sharp upward recovery that whenever indices have tried to take a breather, the feeling comes that finally, the market is topping out and there will be a correction. This also comes from wishful thinking because based on my interaction with so many people in the market, not many in terms of percentage of market participants, expected this kind of a sharp rally.
Everybody kept watching and kept waiting that no, no this does not look sustainable. There is indeed a negative effect on the economic growth of Covid, but the surprise was why the market is not considering that. As we discussed in the beginning, the market is looking for a sequential recovery. It looks like that instead of continuing to hold on to the view that the market will correct, it will correct at some point of time.
It is better to start participating in the market, there are sectors and stocks and we have been discussing all through the last half an hour. The banking stocks have given a good correction in the last three days, some of them are below 10-15% from their recent highs and so despite indices looking very high, there are opportunities in this kind of market and people should start participating and start getting into the market.