Nifty has crossed 15,100 and the Sensex is back at 50,200. While the country is cautiously optimistic about a slowdown in the Covid second wave, the market is showing exuberance. Do you think that we are once again on the path of a bull run?
Market always anticipates. Other than Covid numbers coming down, another point which needs to be noted is that the monsoon is expected to be good and that is always good for the Indian economy and most of the Indian companies, directly or indirectly. I think the market is cheering these two events.
There is a big concern that rural India which was the saviour last time is getting impacted this time. But while rural India is definitely getting impacted by the coronavirus, the prices of farm produce are at a 10-year high. The government will save a lot of money because they will not have to exercise that MSP to procure goods. It will go to the market in the normal course and this will put a lot of money in the hands of the rural economy and farmers which augurs well for the Indian economy and consumer as well as other capital goods. We can look forward to a good six to nine months in the current fiscal once we cross this hump of the Covid second wave.
The specialty chemical plays are doing exceedingly well. Is there anything within this pocket that you would be betting on for a long term even at the current price?
Specialty chemical has been a story of secular re-rating and that process of re-rating will continue for quite some time. This is a fallout of China plus one policy and substitution of Chinese production by production from other countries like India. It is pretty much what is happening across the supply chain. So India’s specialty chemicals companies will definitely benefit. As far as the companies are concerned, Nocil has been our favourite and we continue to maintain our positive view on Nocil. We also like Aarti Industries and we believe that for long-term investors, it is good to have Aarti Industries in their portfolio. This remains our top speciality chemicals pick even at current levels.
Midcap cement has been gaining traction. What could generate strong alpha in the long haul?
My view on cement has been consistent and I believe that cement companies having production facilities and capacity in the central and eastern part of India will continue to benefit disproportionately amongst the cement manufacturers. There are a few pretty well positioned cement companies in this area. One of them, Birla Corp, has been our favourite and we continue to maintain our positive view there. HeidelbergCement is another favourite.
As far as demand for cement is concerned, we will not see major pickup during April, May, June and maybe July. The infrastructure spend which the government is planning to go ahead with may get tempered a bit because of the expenses on Covid and related work but there will be a significant spend by the government and that will definitely create significant demand. Housing demand has been going up in a secular manner and that creates cement demand. So overall, companies having capacity in these markets will benefit because the pricing power will be with them. Both Birla Corp and Heidelberg have been our favourites. Out of the two, we recommend a buy on Birla Corp even at current levels.
Interest rates are at multi-year lows. We are in a low credit cost environment. How do you see banks as a whole? Will there be more asset quality pressure that will surpass maybe even the credit growth potential for banks and financials?
I have been positive on banks for some time. I believe that the second wave will definitely result in some asset quality issues in the short term but by and large, at the valuations at which some of the large cap and midcap banks are quoting, they are definitely good buys at current level for an investor with a longer time horizon.
Some of the midcap banks like
and IDFC First have done pretty well in the recent past. The asset quality has been improving. Their CASA has been improving. RBL also can be talked about in the same breath. They have also raised capital a few months back and the asset quality has been improving. If you have a long-term view, you should go and buy into these banks.
As far as the large cap banks are concerned, it is a fantastic story. a) The banks performance; b) the asset quality improvement and; c) the fact that the subsidiaries of largecap banks like SBI, HDFC and ICICI have also been performing exceedingly well. This allows these banks to exit partially at least from the subsidiaries, raise capital and obviate the need to come to the market further for dilution, going forward.
L&T has bounced back yesterday, what has been your reading on the kind of earnings that they delivered?
After the results came out, we recommended a buy in L&T. A few factors need to be noticed as far as L&T is concerned. a) We believe the worst is over as far as the performance numbers are concerned.
b)In a very structured manner, the company has been going about divesting and getting out of non-core assets. They have been doing that pretty systematically and that is improving their cash flows and the return ratios. Also, the hydrocarbon capex as far as West Asia is concerned is going up. This is on the back of oil prices remaining stable at a higher level. L&T has a very evolved business there and they should be a beneficiary of that.
c) The order book growth has not been spectacular but they have a very strong order book and going forward the execution should improve.
Also the local lockdowns have not been really bad for construction. In most of the places, construction is continuing. Yes, the pace has slowed down but it is not a complete shutdown like it was during the last financial year. At the current level, the stock has corrected significantly and it is a very good buy. We have a target of Rs 1,700 for a 9-12 month period.
The threat of inflation is looming over the US markets. Do you see that as being the next big risk for the markets?
At some point of time, global markets will experience inflation. The kind of liquidity the central banks across the world have injected into the economy will lead to some amount of inflation but they will live with that inflation. The way the US is moving ahead with a $1.9-trillion infrastructure spend, significant economic growth will be expected in the US. They also have probably come out of this entire cycle of multiple waves of Covid. The same can probably be said about the US as well as Europe at this stage and that is a very good sign.
If the growth momentum comes back in the economy, this inflationary pressure will be absorbed by these economies to a great extent and things will move forward. Also, I do not think the FII flows coming into India will get impacted in the near future. The taper tantrum which we saw during the last global financial crisis and which led to markets kind of swaying wildly probably will not be experienced this time. The markets have matured and so have the financial regulators across the world. When the interest rates start moving up, it will be a very gradual process without affecting the market.