On overall IT earnings
Two-three things are clear. One, obviously the demand outlook continues to be positive. Most of the companies have guided for good growth. Two, significant wage inflation is playing out now in the IT industry with strong hiring growth and wage hikes are happening aggressively. Three, in FY22 all large IT companies are likely to see good growth because of the deal pipeline and the deal closures, but margins would be under pressure.
When most of the analysts were projecting for the current year, I was looking at some consensus estimates. Before the
results, they were pencilling in around 18-20% earnings growth. Actual growth looking at the top end of the guidance could be just 9-10%. The markets need to adjust to that. So my view is that given the outlook which these companies have given, downside is limited but absolute gain potential from current levels is also limited, given that earnings growth could be slower than what most were expecting before the results came out.
On whether metals stocks are priced to perfection
Yes. Most of the metal stocks are now very hot stories in the sense that those are the only stocks people are talking of in the context of the lockdown happening in India. A lot of the domestic plays have gone into the back burner. Some people are still looking at export-oriented sectors and then metals. Metal prices have gone up substantially as they continue to rise globally; but in my view, the trade in terms of investment in these companies will become a overcrowded trade and typically now analysts are talking of how the valuations are not very expensive. But that is typical of commodity stocks. Valuations look very expensive at the bottom of the cycle and they look very cheap when the cycle is near top.
We do not know whether it is reaching a top or not, but the rise has been tremendous and further rises look very tough without impacting economic growth. If inflation picks up, then interest rates start factoring that in and we will see some cool off in commodity prices. I would say that investors should be careful investing in commodity stocks because of the sheer run up they have given and whenever the markets or the stocks correct sharply, that will be the time to buy. The corrections could be very sharp. Given the pace of the up move, it could be surprising if suddenly these stocks lose 10-20% and investors who come in at these levels, taking that kind of volatility short term might be difficult. It is better to wait it out in these stocks.
On renewed interest in pharmaceuticals and diagnostics
Pharma stocks went on the back burner over the last many months given the fact that the people were going for the revival play as the banking sector was doing well and some of the other sectors picked up. Now as concerns build up in those sectors, people are looking at defensives and the pharma sector has come into limelight.
Valuations for pharma companies in the historic context do not look too expensive except for Cipla which is trading much above its historical valuations. Even larger companies like Sun Pharma or Dr Reddy’s are trading way below their longer term valuations. The rupee depreciation also tends to help them as their exports get an earning boost. I would think that on risk reward, pharma is decently placed. Sun Pharma on pure valuation growth outlook looks attractive to us and that is what we are holding on the large cap side. We had Dr Reddy’s earlier. We sold it off higher. We are looking for opportunities to get back into that also.
On Bharti Airtel
Bharti has been a stock which performs when people think that it will not do so. We had an initial runup when the stock went up from Rs 350-360 to Rs 600 plus and then a lot of people started getting bullish on that and then it went into a phase of underperformance. However, looking at what they have been doing in the market in terms of gaining market share, the fact that pricing is holding up decently and also given the fact that they are now becoming a more dominant force in the telecom industry, the restructuring is incremental only. I do not think that adds hugely to the return potential.
But if you look at the largecap universe, there are a few stocks which still give valuation comfort and Bharti is one them. So I am positively inclined. This stock has the potential of giving 20-30% returns over the next one year which most large caps will find it difficult for them to give.
On sugar stocks
is a good story and we have been holding the stock for a long-term from much lower levels. There has been a paradigm shift in the growth prospects of the company. There was a stage when the company would get around Rs 250 crore average orders per quarter and the turnover was Rs 1,000 crore. Now we are seeing a potential investment cycle of Rs 30,000-50,000 crore in the ethanol space over the next three-four years. Praj has a very high market share in that.
So how much of that investment will come, how much they will be able to capture is something we need to see but all said and done, the growth prospects have changed. When there is a paradigm change in the way a company can grow, typically the valuations will need to expand and that is something we have started to see. As the story becomes stronger and brokerages start covering, we will see better returns. I would think that the story still has significant legs.
Given the pace of the up move, can it give jerky corrections? Obviously it can but the longer term prospects are positive.
On Covid 2.0 and the impact on banks and insurance companies
The impact could be adverse for both the sectors because this time, the claims on the insurance side could be bigger than last time because last time there was fear and the actual incidence was low. This time, the incidences of infections are much higher and hospitalisations are much greater. In the near term, that could come down. So there is risk to insurance earnings and growth both.
For banks, the challenge will come about depending on how long these localised lockdowns or generalised lockdowns last because many of the MSMEs were stressed last year but they came through with whatever debt support, government support and low interest rates played out in their favour, But another round of longer shutdowns will be tough. So it will all depend on how long this lasts and that is something which we need to monitor because each week’s addition to lockdowns could increase the risk to banks NPA issues exponentially. So risk is there, but how much, we need to assess.
We should not be focused on cash flows because while Tata Motors has cut down capital expenditure substantially for last year, they have announced significant cash investments for this year. So last year’s cash flow should not be given too much importance. The key is that Tata Motors is least impacted by what is happening in the Indian domestic economy in terms of shutdowns and impact on freight etc. A large part of its value lies outside and in countries where growth could pick up. Tata Motors remains reasonably well placed and could be looked at by investors, even at current levels and on corrections.