Would you say the biggest takeaway from the Infosys numbers was that highest ever deal value of $7.1 billion? Do you believe that the outperformance of Infosys versus the IT index is likely to continue?
Across the IT pack — not only Infosys but also TCS and Wipro — we have had blockbuster numbers. In the last five years, we have seen the seats change. There has always been a tug of war between Infosys and TCS for the top position in terms of consistent delivery of numbers on the margin front and constant currency growth.
What we have seen across this sector in this quarter and also the last couple of quarters is that IT has come back to the fore. The world is shifting towards information, technology and digital revolution and Infosys is deriving 45-50% of revenue out of its digital business now. That augurs extremely well plus margins of these companies have been expanding and the deal pipelines and the management commentary as well as their body language have been extremely confident. The stock prices have run up a little bit ahead but give and take 5% to 10% here or there, all these companies will remain buy on dips for the next two-three years.
Is SBI now poised for a new round of momentum?
I think yes. Across the banking sector, we are seeing a laggards’ rally which is probably also prevailing as a theme in the market. Initially companies like HDFC Bank, Kotak Bank and then Axis and ICICI ran up. Clearly there is under-ownership in PSU banks. SBI, probably as a play for capex or play for maybe a corporate as well as a retail bank and as a substitute for the GDP growth, is clearly one of that candidates.
But if you want to be with companies which can give you five-year, 10 year CAGR returns and do not want to miss out on good returns in a bad cycle, then top private banks have 18-20% CAGR. Yes, SBI would come up with its set of risks and whenever there would be farm loan waivers and stuff like that or according to the government’s sort of a behaviour, SBI would be dependent on that.
So rather than getting into PSU banks, one should get into high quality financials like top private banks or insurance companies. On the back of lower penetration and density, what private sector banks did for the last 10 years, insurance as a sector can do for the next 10 years.
Eyes are also on commodities. Which direction do you think they will take from here? SAIL will continue to be in focus on the back of that OFS but some of the other steel majors have also joined the rally. Is there still meat left in this rally?
Yes there is some meat left in the rally but the only problem with cyclicals and metals as a sector — be it aluminium, steel or even copper — is that it is extremely difficult to gauge the trend of this type of commodities. We have seen a lot of pent-up demand across the world and even some structural demand in India has come back.
Also, metal prices have just shot up and a lot of companies say they do not have stock for supply. So there is some bit of shortage playing in this commodity cycle and that is still to be explored. There can be some upside from here but we would be ready to sacrifice that type of an upside for reasons which are out of fundamental control. There are a lot other sectors which are proxy plays to this type of metals or cyclicals. We would rather focus over there. But for people who would have bought Tata Steel and stocks like that, it is a good time to hold, if not buy.
We are seeing strong action building up in M&M and other auto stocks. What are you eyeing within this pack?
This has been a real blockbuster rally for all the auto stocks. A lot of productivity improvement has happened across the listed corporates in India and particularly for M&M, efficiency has proved to be very important and the management has risen to the occasion and changed the dynamics of the business and productive businesses were given more leeway and operating impetus.
Such measures taken by a lot of these companies helped them to come out of the bad cycle. Plus there was pent-up demand, as the auto stocks went through their worst phase, in the last one and a half, two years. They were just written off for diverse reasons like BS-IV to BS-VI migration, the insurance issue and a lot of such issues.
There was a debate going on whether the demand we have seen has been pent-up or structural demand. Looking at the December sales number, , it seems a little more structural. Probably March quarter data would give us a better idea. We have companies like Eicher Motors, Maruti in our portfolios and these underperformed for a long time and have started to do very well. So yes, this theme again would be a buy on dips, but you need to be very selective because the stocks have run up too far ahead of expectations.
Would you lean towards midcap IT because if largecap IT is growing exponentially and midcap IT stocks are not that expensive? What are your top two ideas from the midcap IT space?
IT as a space overall looks good and largecap IT has already delivered and there are some midcap IT companies which operate not only out of India, but in the offshore market. These are companies involved in artificial intelligence and automation procedures and they will probably do well.We had companies like L&T Technologies which we have been bullish on since quite a long time. The company again underperformed for some time but it has come back and performed extremely well and the numbers will show up in the next two to three quarters.
Other than L&T Technologies, we also like Honeywell Automation. It is nowhere in the IT space but as an infra substitute or in the automation space such type of alpha themes would probably do very well in the market where there is a demand for good companies with high ROE, ROCE. These themes will prevail for a longer time.
DLF has been standing out among realty stocks and with any news it is bound to see further interest.
Building material as a proxy play and it has been an extremely rockstar type of a sector — be it paints, ceramics or lately even cement. Real estate as a space for investing has emerged but it is extremely cyclical in terms of business. However, for the next couple of years, it could do well. We need to look at building materials as proxy plays because they will be beneficiary of new demand which will come back when prices come down, the pent-up demand from lockdown times and thirdly, replacement demand which is still going to prevail.
These themes would probably do a lot better than playing directly through real estate companies.