Did you tell your clients to cut some of the trading positions when midcap stocks collapsed by 5% to 15% and on Tuesday did you tell them to buy again?
It is a little bit of a wishful thinking that one is able to catch the exact correction in the market. We have seen time and again that when somebody tries to do that too often, one misses out an opportunity. Our view is that we are seeing a fair bit of positive data points and the overall earnings upgrade cycle is in.
For investors, it does not make too much sense to try and finetune these corrections because they will come and go. In the bull market, we have seen that after a strong rally, one sees 5-7% kind of correction at the index level and there is no point trying to catch it. But if you are a trader, then it makes more sense to have your trade plan or risk management in place, so that your overall exposure and capital protection is there.
Our view is that despite the kind of runup that we have seen and the news flow globally as well as within India, things are looking positive. We should be positioned to take advantage of this opportunity by getting into sectors and companies that we like.
IT companies are managing to get very big deals. Is there scope left for big IT stocks like TCS, Infosys, Wipro to give another 10-15% return in six months?
The companies are winning $1-billion-plus orders and if you look at the valuations, Infosys is quoting at 21-21.5 times FY22, HCL Tech at about 16 times and Wipro around 17. Only TCS is a bit higher at about 26-27 times. Our sense is that there is a case for a significant earnings upgrade across these IT names and more so in Infosys, HCL Tech and Wipro. There is a case for a 20-25% upside in these largecap names even from the current price point. We should definitely take advantage of this earning upgrade across IT and increase our allocation in this space.
A large part of the market is veering back towards defensives like IT, pharma majors and staying away from some of the cyclicals or utilities. What about you?
We have seen a very smart sectoral rotation in the last six-seven months ever since this entire rally has started. In the last leg of the rally, there was a strong participation from the banking and financial services and the midcap and smallcap space and we are seeing a bit of a consolidation in sectors like IT, pharma and consumer. That will keep on happening and it is more important to look at what kind of allocation and which stocks one is selecting in the portfolio to participate from a longer term as well as from a momentum point of view.
Our strategy is that one should have a decent exposure to sectors like IT, pharma, banking and auto, etc. In midcaps, one should be mindful of overall allocation and companies you are getting into. There is no real change in our strategy per se.
We are tracking the BPCL privatisation and that is a separate case in itself. There was a massive reversal in ONGC on Monday. How are you seeing things evolving when it comes to this pocket?
There are a couple of things to look at when it comes to the energy sector; one is of course the BPCL divestment. We have been hearing about the fast-track nod that one can really get and the kind of interest that is shown by some of the companies. I definitely think whenever that happens, there is going to be some sort of a rerating for BPCL and some of the oil marketing companies. They are positioned well.
The other topic which is not very widely talked about is the fact that in case of Reliance Industries, the way the petchem margins have actually expanded in the last few months, the entire focus has been on Jio and the retail part. But there will be a case for some upgrade in the petchem part of the business which probably needs to be captured in the earnings upgrade that we may see.
The third part would be the play on the industrial pollution, given the kind of news that came out wherein DPCC mandated a 100% use of PNG. If pollution becomes a big theme, then companies like Gujarat Gas and IGL could be an interesting space to look at from an investment perspective because there will be a significant increase in the volume as far as these companies are concerned. These are the names that we like within the energy space.
Which are two or three stocks which you told your clients to buy on Monday when markets fell?
Since our view is overall positive on the market, the names that we like are basically some of these largecap IT and pharma names. So companies like Sun Pharma, Lupin, Bharti are the names that we are comfortable buying among large caps.
On the midcap side, we like names like Crompton, LIC Housing and Aditya Birla Fashion. We have a bunch of names in the large cap and midcap spaces and whenever there is a big correction in the market depending on the price movement of these stocks, we recommend to our clients and we think that these kind of small corrections will keep on happening and we should take advantage of that as long as the market is giving you the comfort of positive data points.
Where do you stand on the PSU candidates? It seems the entire disinvestment process is picking up pace and BPCL disinvestment should happen in less than six months?
We have been hearing positive news flow and sometimes there are delays also that we have to be mindful of and definitely there is a lot of value in BPCL. Depending upon which companies are bidding for it and what valuation it gets, which should be substantially higher than the current valuations that could actually create some sort of a rerating for some of the PSU names.
Given the kind of positive data points and the fact that the government has announced buyback and some sort of a curb on the OFS companies like Bharat Electronics, BPCL and Coal India are some of the names including the ones like ONGC where the dividend yield and a slightly better earnings would translate into a positive sentiment, but at the same time, we have to be mindful of the fact that these PSU names are more like may be 15%, 20%, 25% kind of a story.
I do not think we can take a very long-term view. These stocks cannot possibly become wealth creators per se given the way they have performed in the last five, seven, eight years. Since we are in a bull market, there will be a bunch of opportunities to play PSUs depending upon the triggers but one needs to be a little careful about what you are getting into and more importantly, the exit from the sector.
What is your view on Tata Global?
Tata Global has transformed big time over the last three years from being a sitting duck and not going anywhere to a company which is doing phenomenally well in terms of the kind of the product categories that it has. The way they have gone about creating a category, whereby they supply these online stores under the Sampann brand and on top of that, if the Big Basket deal finally concludes, then it will make it a very strong integrated player with a good amount of FMCG presence with online delivery capabilities.
Given the way things are panning out whereby you are trying to find companies which have a combination of FMCG online, this will be one of the companies that will fit into that theme. This is one of our preferred picks in the FMCG space which is still at a reasonable discount to some of the other FMCG companies like HUL and Britannia. It has to be a part of the core portfolio with a reasonable amount of allocation.
Much like Tata Consumer, ITC has also been a late mover. Where do you stand on the entire ITC investment theme?
It has been a good value company but there is a massive derating that we have seen over the last two-three years and more importantly we are not seeing the contribution of the other businesses in the overall EBITDA. At about 81-82%, the cigarette business still contributes most and unless you see the FMCG contribution increasing in a meaningful way, the Street would be little reluctant to give FMCG the higher valuation. Globally, the cigarette companies are not getting higher valuation because of multiple issues around it and that would be the case for ITC also. Though we like the stock on the valuation standpoint, it is not one of our top picks within the FMCG space.
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