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India is in a bull market and it is going to last long

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The product business in India is getting traction. If there is a revenue momentum in both internet and product businesses, then profits will be significantly higher, says Pankaj Murarka, Founder, Renaissance Investment Managers.

Message for investors
I would like to give a message to investors that we are in a bull market and probably we have seen the first move in the bull market which is going to be pretty long. Once we exit the Covid crisis, the Indian economy will emerge relatively stronger than when we entered the crisis. Also the economy would be a lot stronger than its peers and investors should participate in this rally.

On TCS and IT sector as a whole

Pankaj Murarka: Right from the first quarter’s numbers, TCS and all other IT companies have been giving a pretty robust outlook. We have seen a second upward momentum in terms of deal signing. IT services are seeing a significant uptick in the work that is flowing to them because of significantly higher spending on technology globally. Otherwise, traditional businesses are also spending much more on technology to upgrade their business.

This is clearly a very sweet spot for the whole IT services business and keeping with the tradition, TCS most probably will surprise the Street with its numbers meeting the consensus which they generally tend to do. They have very fair and articulated capital allocation policies and I think the buyback is also a very constructive move.

Is TCS stock priced to perfection?

Over the last 10 years, TCS has given a 18% CAGR return for shareholders. Given its size and scale, I still think they can continue to grow in high single digit, low double digits in dollar terms and if that is the case, then for shareholders with a medium to long term view, the stock is a reasonably good investment.

However, in the short term, the stock can take a pause just as it did in the last six months from April. Now the stock has doubled and it can take a breather. But for investors with a medium term view, the outlook for Indian IT services in general and TCS in particular continues to be positive.

On opportunity in internet economy
India’s internet story is very recent. Over the last three or four years, the smartphone user base has doubled and gone from 400 million to 800 million as data prices have come down very sharply. Data consumption has gone up 5 times. Data consumption in India is still growing at 30-40% CAGR and will continue to do so for the next five years. The whole internet economy in India is very small and nascent and it can grow at a very high rate for a long time to come. InfoEdge is at the cutting edge of some three or four very permanent internet businesses which they have built over the last 15-20 years. So while the stock is going exceedingly well, we remain positive on the stock from a medium term to long term perspective.

Apart from that, we like the whole space and there are a lot of other businesses in the internet space some of which are listed and many more will get listed over the course of time.

Where to invest in IT pack, besides InfoEdge and TCS?

We are seeing emergence of certain product oriented IT companies in India. We have reached a stage where some of these companies with revenues crossing $100-150 million can achieve critical mass and scale. We saw one large deal happening in one of those companies where their whole business got bought out by a large PE fund in the US. The product business in India is getting traction. If there is a revenue momentum in both internet and product businesses, then the translation of revenues to profits is significantly higher.

On recovery in tier-2 and 3 towns & the consumption basket

The trend is very evident that the rural economy got much less impacted by the Covid crisis as compared to the urban economy. Also this is the second successive year of above average monsoon and it is evident in the crop sowing pattern as well. The rural economy is extremely resilient and doing extremely well. It is also visible in the tractor numbers. While the auto numbers have declined over the last six months, tractor sales have been pretty robust. In fact, tractor companies are having one of the best years in the last five years. So consumption will be led by the rural economy or the tier-2 and tier-3 towns and as the economy opens up, we will see a very sharp rebound in consumption.

On the metals basket

The sector tends to be extremely volatile and so we are staying away from the sector. Having said that, the one big trade which is playing out globally is inventory restocking. Because of the lockdowns, we have seen a sharp depletion in inventory across the entire distribution chain, right from the wholesaler to the dealer and retailer.

We are seeing a very aggressive restocking and that is visible in China as the Chinese economy has almost normalised and probably this quarter they are likely to record a positive growth. As economies open up globally over the next couple of quarters, we will see a very aggressive restocking and that is going to be extremely positive for metal companies. This trade has some more legs to continue.

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