The real estate sector is holding out very well. There is news that the Maharashtra government could be cutting the construction premiums by nearly 50% till 31st December.
All of us market participants are very good at doing post-mortem and analysis of why something has moved and something has not moved after the action has happened. Of course, it is always a challenge to be able to predict it in advance and that is what is actually required. Having said that, let me juxtapose it in the current market conditions.
The market has been going up one way and besides the positive surprise and/or unexpected economic recovery that seems to have been taking place despite the export numbers being down for the last two months. There are lots of other parameters which are clearly showing positive growth especially in the recently gone by festival season. Other than the liquidity inflow, this has been one of the major things. We have received close to $10 billion inflows from FIIs in the last one month or so. In the short term, it is always liquidity which drives the market both ways.
If liquidity comes in, in terms of demand-supply and the demand for any particular asset class, commodity or in our case the equity, shares go up as is the case here and that has resulted into the sharp rise in the market. Conversely, when there is liquidity outflow, there will be more supply and the stock prices will come down. Now when there is this kind of continuous liquidity inflow into the market, continuous demand and continuous buying of shares, sectoral and stock rotations tend to take place.
In the initial period there will be one or two or three sectors that will participate, then it will move on to the few other sectors; gradually in the second phase of the market, new money will start looking for undervalued or under participated stocks and shares with the reasonable focus on quality as well a long side. This has been happening over the last two weeks or so. That is why every alternate day or every second or third day we see the under participated sectors coming under limelight and buying moving into those stocks. That in my view is probably the reason why yesterday was a real estate day. On Tuesday, the autos were badly down and for the last two days, we have seen interest coming in auto.
For the last few days, there has been consistent interest in the public sector companies. Before that, it was in public sector banks.
Of course, that does not take away the fact that real estate demand seems to have picked up, the numbers that are coming in for registration, for inquiries based on feedback in the secondary market channel are clearly showing an uptick in the last two-three months. This kind of rotation will keep happening till the time money keeps coming in.
The rural theme continues to be robust but what is grabbing your attention within the auto pack?
Based on the rural theme recovery as well as the overall automobile recovery and a little bit of valuation comfort, especially in the good performing sectors and businesses, if one has to optimise between the fundamentals and valuation, I would like to move from OEMs and large caps to midcaps because the participation has been too much. It’s not that they cannot continue to go up if this kind of buying and market interest continues, but these stocks are something that will continue to go up. Swaraj Engine is one of the picks. The company is probably operating at almost 100% capacity and that could be a challenge since there is more demand.
There has been a surge in tractor demand and obviously there will be demand for tractor engines in the same proportion and that is where the stock features in. The stock has moved up around 7-8% in the last one month or so. So that is one of the opportunities. There are many more and one can pick and choose based on individual comfort.
Do you have a preference in terms of the way you are looking at some of the stocks and pickings in commodities?
No, I do not have any specific picks. In case of ferrous steel, Indian manufacturers have recently hiked prices in line with global price hike. The recent price hike has been in line with quite a number of hikes that have been happening over the last few months. Imports by China from India have been one of the big supports. Of course, increased auto, consumer durable, kitchen appliances demand means steel demand has been going up in India as well. The September quarter numbers of quite a lot of steel companies have been better than expectations. These are some of the reasons why we continue to see buying interest and stock prices moving up for the steel sector.
SBI is being preferred as a possible risk-on play going forward. What kind of upside potential do you see in SBI?
Before I specifically comment on SBI, let me make a disclosure that I have not been a very great fan of public sector companies, both financial as well as non-financial over the last few number of years but coming to last two months we have seen the PSU banking index going up very sharply.
In fact, if the November PSU banking index is up some 24% odd and subsequently it has seen a rise in December as well. Subsequently, the same buying interest got extended to non-banking PSU companies also. So, quite a lot of non banking PSU companies have been rising in the market in the last few days.
Fresh money keeps looking for under-participated and on a relative valuation basis, attractive sectors and stocks to move in and that could be one reason.
The other important reason is that the government has said that three new criteria will be added for evaluation of public sector companies and these three criteria are return on capital, market cap and non-core assets sale. That is one of the triggers which possibly can lead to sustained outperformance of public sector companies. If it continues to happen, if not the current rise could be a temporary relief or blip that has always happened in the past also. That is making me wonder if I should change my view on the public sector companies. Would there be a sustained rerating if the government insists on these valuation criteria for these companies.
Having said that, we have seen State Bank of India moving from a low of Rs 150. Keeping that aside, Rs 180-190 is where it was stuck for quite some time and has moved to above Rs 260-270 over the last two months or so. On a valuation basis, it continues to remain at a sharp gap to its private sector counterparts, but so is the gap between the ROA of SBI and its private sector counterparts.
Whether the recent interest in the public sector space will sustain or not will be the decider. Two, if the buying interest continues, then in the short term, we can see another 10% odd or so movement in SBI. If not, everything will be corrected and so will SBI.
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