You track the IT space very closely. While the Q1 numbers may be irrelevant, what have you made of the body language? TCS has been the only one to declare its numbers so far and they appear more and more confident than they sounded last quarter. The recovery is well in sight and from the previous quarter itself, the pandemic outbreak has bottomed out in terms of reflection on their balance sheet. Do you think large IT players can cash in on the Covid opportunity to try and gain market share and increase their digital revenues going forward?
Yes, clearly Q1 will have to be looked upon as an aberration because like everything else, they too have been impacted and had guided for slippages in revenue side for the first quarter. But right through post March and even on the current earnings call, they have guided that the coming quarters are going to be stronger and the worst is behind them. They are saying Q2 essentially is when things will start to normalise and will gain momentum in both Q3 and Q4 of this financial year.
We also have to keep in mind that their customers cannot do without them because essentially the services which the Indian IT companies provide is pretty much non discretionary in nature and I believe that the US economy is going to have a recession in this calendar year but will be able to come out of the woods post 2020.
Clearly towards the end of the calendar year, you will see the US companies being positioned for a recovery and growth and that is the time when they will start coming back to their IT budgets for the next calendar year.
On the whole, the IT sector looks good. There has been a sharp run up in stock prices recently. So one has to be very cognisant and careful of that and we also have to keep in mind that the elections campaign in the US is progressing. Between now and November, you are going to see a lot of political rhetoric during the campaigning and talks of basically H1-B visa restrictions and all of that and the administration is trying to come hard on immigration.
All that will continue to be some kind of a dampener and I would think that the strategy for the Indian IT sector should be to basically buy on dips and look for FY22 and beyond. That is what basically I would think and I think within the overall pack while yes, of course the larger companies do look good but I think there are going to be pockets of strength even in the tier-2 and midcap space.
How is the entire PSU story to be approached as an investor? While the government’s intent has been very clear, the fact of the matter is that you are not going to be able to sell the family silver at the price of gold, given the current circumstances and environment we are in?
That entire pack is event driven. It is hard to look for companies where you can really bet on strong earnings growth. It has become entirely event driven — whether it is privatisation or disinvestment or for that matter getting orders from the government, especially areas like defence and aerospace. That is the space which is totally dependent on the government. It is becoming very difficult to make medium to long term investments in the PSU pack on an aggregate basis, unless one is willing to take a call in terms of various events. It is best to avoid the entire PSU pack.
When there is a fair degree of certainty yes, you might end up buying some of the stocks higher but it would probably be better to bet on that pack only when you believe there is a very high degree of certainty in terms of the event playing out.
Of course, given that the government has already embarked on the path of privatisation and strategic disinvestment, it will happen someday though at this stage it is hard to figure out whether this is going to take two more quarters or two more years. That is the uncertainty one will have to live with as an investor. Maybe you will be better off betting on them when you believe that there is a higher degree of the event actually materialising and that would probably be the right time, rather than trying to pre-empt when that is going to happen.
We have seen a trend of retail investors getting out of SIPs and looking at the direct markets as an option in terms of returns, given the kind of move that we have been seeing of late. In light of that, where do you see more opportunity for potential returns in the nearer term on the back of the recovery? Would you stick with the preferred plays — slightly safer bets or would you also think adding slightly more riskier names or even perhaps names like manufacturing cyclicals that could see a sharp bounce?
Overall, there is a very interesting set of opportunities out there and one will have to essentially construct their own portfolio based on what you basically are the most comfortable with. At this stage, probably one needs to kind of have a blend or a mix of things. I have for sure bet on basically growth coming back post two to three quarters and to that extent, a lot of businesses which are beaten down versus where they were trading at in terms of valuation multiples a few years back. Those are a great set of opportunities clearly. Some of the defensives are positioned really well. Clearly that would increase areas like pharmaceuticals, consumer staples and may be to some extent, utilities from defensiveness point of view.
Third, betting on global recovery. We believe that technology and IT services will be a great way to kind of play and bet on a global recovery and global growth.
Lastly, consumer discretionary stocks, about which I am not too sure whether consumers in urban areas are going to go out there and buy top end washing machines and things of that kind. But I believe that consumers in small cities, towns, villages essentially with the kind of buoyancy that they are seeing in that part of the economy, are going to be left with the consumables surplus which will find its way into a lot of areas like housing and some of the allied sectors like cement, building materials as well as some of the very basic consumer appliances and home appliances like kitchenware and things of that kind.
These would be a very interesting set of opportunities which investors can look forward to and go ahead and build a portfolio based on their comfort with the individual styles out there.
If my memory serves me right, you are the only fund manager who has exposure to PSU stocks. You have been owning EIL Engineers India for three, four, five years now. There seems to be some galvanisation in PSU stocks, BHEL has moved from Rs 25 to Rs 44-45, SAIL from Rs 25 to Rs 34-35, BEL from Rs 60-70 to almost Rs 100 now I am sure EIL would have moved in the similar pattern. Do you still own EIL? Do you think there is money to be made in PSUs because they are now in that so called deep value zone?
Why we have been liking Engineers India for a while is because there are really no individual set of events out there and it is not up for sale. It is not likely to be privatisatised very soon and it is in services business. It does not deem to do any significant capex for growth and it has pretty much a monopoly in the space where it operates. To that extent, Engineers India is more a bet in terms of basically their earnings, their cash flows and the capital efficiency. Of course, post the correction that we have seen in Q1 of this calendar year, we have seen valuations also come off and become very attractive. We continue to own and remain buyers in Engineers India. The business is still rock solid, they had a great March quarter and their outlook for the next one or two years is very strong. At these kinds of valuations, it comes across as one of the most attractive bets not just in the PSU pack but overall without any event or something to really bet on, It still looks attractive for us.
What is your view on SBI Cards because I am yet to meet a classic value investor who says he likes the stock and wants to own it. SBI cards is one of those businesses where the ROCE is north of 30%. Their balance sheet does not need capital to grow. What is your view on a typical proxy on Indian consumer because if we consume more, we will be transacting less via currency notes and more on a credit card or on a digital platform?
That is a very interesting opportunity but I think what has really changed over the last few months is that I think prior to the March selloff or the Q1 selloff, most private banks were trading at relatively higher valuations versus where they are trading right now and so to that extent may be at that point of time a standalone company like SBI cards, made a lot of sense.
But we have to keep in mind that SBI cards is dealing with unsecured business. The loans which they give out are not secured and therefore one has to keep in mind that some of these unsecured spaces are not as safe as you might think and obviously pose a very different kind of risk. My view is that at this stage and given the kind of challenges which the banking and the credit plays are going to witness over the next few quarters in terms of their asset quality, it still makes sense to be with a more universal kind of a bank which is very well run, the portfolio is time tested and all of that.
At this stage, I would probably prefer a very comprehensive well managed private bank versus a standalone credit card company or any other fields. May be, two quarters down the line, if things get normalised, we may see the portfolio of the credit cards business essentially gone through some kind of aging, then maybe it is better to probably take a call then. But for now, well run private banks are a better play versus some of these standalone NBFCs or credit card loan companies.