Do you think this kind of market where IT is strong and banks are weak will continue for a long period of time?
The rally had started with pharma and IT and then consumer names. So IT will continue to do well as it is least affected in terms of their businesses. Pharma obviously is doing well. Most of the IT companies reported strong numbers and came out with good management commentary. My sense is IT should still lead. Midcaps have done very well in the last couple of months and now large caps are also participating. TCS and Infosys can participate more from the current levels.
I know there is no correlation in terms of business models, but psychologically if US tech stocks are underperforming, can the TCS and the Infosys of the world outperform?
If you look at the entire IT pack, prima facie, these businesses were least affected. TCS, Infosys and a lot of midcap companies doubled from their lower levels and most of them are at their 52-week highs. The correlation between the IT pack in the US and India could not be more relative in that terms.
Taking from the recent trends and data we picked up it really looks like auto is bouncing back.
Since the last three months, the auto sector has done quite well and I look at it in terms of the last ten-year historical average for the auto sector as a whole which is trading at a hefty premium of 25% historically. My sense is basically this trend is obviously between good monsoon and the least impact at rural levels, where the rural demands have been picking up in the auto sales.
This should continue and this month also the festive season is coming on. So there could be much better outlook as well. Auto should perform well but near term the valuation looks challenging but if we discount that, then the auto sector — definitely in two-wheelers and passenger vehicles — should outperform.
I want to ask you on insurance. You got SBI Life. You got ICICI Prudential, ICICI Lombard, Max lots of insurance names. How does one figure out which is a good insurance stock to buy?
Most of the people are moving out from the BFSI segment, especially from banks to insurance play. Life insurance valuations are quite steep for most of the companies but this will continue because we have only few companies on a listed space. Top of my mind are the stocks which look interesting in terms of the way they have been managed. So SBI Life is the top bet. Relative valuations are cheaper than ICICI Pru and HDFC.
Second if I look at them in a valuation perspective, then Max is the second play which one should look at. So these two remain the top bet in terms of valuation but obviously it should be a basket of all the stocks if one has to play the insurance name rather than just betting on one or two names. So HDFC Life, ICICI and all these three-four names one should be added in their portfolio.
“There could be some cool off in the consumer names and I would avoid these for a while.”
After all the buzz which has neither been confirmed nor denied by Reliance Industries, have you already revised your price targets upward on RIL?
If Reliance is not part of the portfolio, we will be definitely underperforming for some time. One should definitely have Reliance as a part of one’s portfolio. This should be the stock of the year. Another 20-25% upside is easily achievable in over a year in this stock. One should be in this stock and two sectors which are doing well right now are telecom and retail. Both are tech plays and so my view is Reliance should continue to do well going forward as well. It is the right candidate to buy on dips.
The view on the street is that Grasim has got ownership in Idea and Idea may not need capital and Grasim’s balance sheet is not going to get dented. Would you buy this simple logic and does that make Grasim attractive?
Among consumer names, Colgate has done quite well and in the valuations metrics, PE has moved to 42.7 whereas the last 10 year average PE has been 36. So the entire sector is trading at a premium.
There could be some cool off in the consumer names and I would avoid these for a while. In fact, I would play in case I have to play the sector leader like Lever into it rather than going to a specific segment. If someone wants to play, Lever is a better opportunity in the entire basket rather than going into a specialised play or something.
Will markets continue to disregard the deep value argument in SBI because they have done that for the last 10 years and will it continue for another couple of quarters?
One thing we need to remember is that this bull market is led by technology, pharma and consumer names. The financials definitely have been taken off beat and should continue to underperform. In larger banks also, if you look at the historic valuations, all these financials other than the corporate banks have cooled off.
So there could be pressure and the Street is estimating there could be more pain in the PSU banks for next few quarters. But if you are an investor with a three-year horizon, then one should take a bet on banks like State Bank or ICICI Bank.