The pharma basket managed to inspire confidence in trade and generally a trend when we see acute volatility picking up in the equity market, one cushions the fall by betting on defensives. Is that the strategy that you would use and would pharma make the list?
It is a natural move. Investors want to deploy cash in the market and with incremental flows coming into equities, land up in defensive stocks like pharma but we are not that great fans of pharma companies. These companies did well during the Covid times but thereafter, there are many challenges.
The US generics market is under a lot of pricing pressure and domestically also, there is a lot of competition and although volumes are decent, the cost increases are being really passed on by the pharma companies. I would like to be a bit neutral to underweight in pharma and this correction is a good time to get into good quality growth stocks.
is a must have and is already a part of all portfolios. But this has been quite a disappointment for 2022 so far. What can one expect from Reliance?
That is right. From time to time, good quality stocks also will undergo a correction and eventually the businesses will start to play out really well and contribute to the value of
Ours and Street concerns are around unlocking all the values which have been created in these new-age businesses – digital, retail as well as new energy and there is now clarity coming through from the management on that whether they will split the company, which is most advantageous to minority shareholders or then just do IPOs for these subsidiaries, in which case Reliance Industry becomes a holding company and eventually holding company discount comes into play.
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So there is a bit of a mild disappointment on that front but by and large, corrections are part and parcel of owning a stock. I would remain invested in a good quality stock like Reliance despite the underperformance. I would look at making fresh investments only when there is more clarity on the structure of the company and how the value will get unlocked in the subsidiary companies which are now reaching a very good scale and have established a decent track record. There is a lot of appetite from investors to buy these standalone businesses rather than a conglomerate like Reliance Industries.
From a shareholder perspective, would you look to buy or add positions to now?
No doubt, Tata Motors is a great company but they are going to face headwinds in China as well as Europe and the UK which are the key markets for Jaguar Land Rover. Tata Motors is still all about Jaguar Land Rover and not so much about the domestic business because that is one subsidiary which contributes in a huge material manner to the consolidated figures of the company.
Considering that China is in a bit of a slowdown mode, and we all know the crisis happening in Europe and the UK, I would be a bit circumspect. Also, the way the currency markets are moving, there could be some impact of that on Tata Motors as well. One would like to buy into certainty and there is a great deal of certainty with
, M&M and something like as well.
I would pick my key auto stocks and this is going to be a great time to be investing in auto companies and auto ancillaries because the kind of numbers we expect for September will be pretty decent and the entire festive season is going to be the best ever for the auto industry. We are overweight on auto but the preference is for M&M, Maruti, Eicher Motors and some of the quality midcap auto ancillary companies.
Are markets discounting no growth from JLR? Is the Tata Motors stock at Rs 400 pricing that in already?
JLR is like an ocean. I would say a black box. I have been tracking JLR numbers for several years now and every time it is going to come out with a good set of numbers, they ball a googly either on pensions or on forex rate movement or some provisioning here or there and then that is a huge disappointment. When you throw in the towel with JLR, they will come out with a fantastic volume and sales number and improvement in margins as well.
So there is a great deal of volatility in JLR’s figures and I think that is stressing out the investors in Tata Motors. This kind of lack of visibility certainty starts to creep into the valuation. No doubt, a lot of the other businesses are doing very well for them, the domestic business, the EV business; but a large part of the bottom line does come from how JLR performs and there is a great deal of uncertainty over there.
Everyone has a favourite mid-tier private bank – City Union, Federal, RBL, some folks also like as a turnaround case, which one is your favourite, which one do you own and which one do you plan to buy in this decline?
, no doubt about that. A disclosure, we and our clients are invested there and so maybe our views are prejudiced but look at the track record. They have no doubt been hit by NPAs but a lot of those NPAs were because of IDFC. The corporate loan book and the wholesale loan book have been completely provided for. The management has done a great work as far as creating CASA is concerned and retail lending has been pretty disciplined, valuations are reasonable and we have a dynamic, aggressive management in place. It is a very good tech platform as well and earnings growth is the best in class. So, it is very positive on First.
One can also look at
. It is expensive but they have managed the banking crisis pretty well. There was hardly any major drawdown as far as NPAs were concerned and this is one company which has got a good footprint for growth.
Again, it comes to very decent standards when it comes to lending and very aggressive best in class growth rates. These are the two midcap banks we are very positive on. It goes without saying that a large part of one’s portfolio should be in the largecap private sector banks, the likes of ICICI, Kotak, HDFC or Axis and then one could have small allocations to these midcap private sector banks.
If one is bullish on financials, then why not stick to large names? There is enough data to support that the CASA, the market share gain, the incremental savings and deposits, a lot of fee based income, technology upgradation have migrated or will continue to migrate to the large banks. Midcap banks may be cheap but maybe they deserve to be cheap?
I completely agree with you but you should go back and trace the history of banking stocks. Whenever banking industry is in a growth zone or a blue sky scenario, it is the midcap and smallcap private sector banks which start to report exceptional growth rates and the market tends to think that now this is going to be sustainable and they will eventually become much larger than what they are and you would start to create value.
By and large, midcap banks are available cheaply and there is always the scope for price to earnings, price to book to get rerated upwards to the level of say an ICICI or HDFC or a Kotak. That process happens time and again till the point of time when the NPAs start to creep up for the industry and you realise that the smaller private sector banks are hit much harder than the larger ones.
So while we are in this blue sky scenario and exceptionally good environment for banks, smallcap private sector banks will continue to do well and maybe even outperform the larger cap private sector banks.
That is why there is a bit of a trading opportunity as well but the two names I said; IDFC First and AU, are good long-term picks and eventually will scale up to be excellent banks and deliver very good value to investors. One just needs to be a bit patient and have a longer term horizon in investing in them.
What is the outlook on NBFCs because reports seem to indicate that amid this debt fund outflow and low bank funds, a lot of NBFCs are staring at a liquidity squeeze. Is this a concern and will it be temporary in nature?
One has to be very selective with NBFCs. That is one lesson I learned in the IL&FS crisis that NBFCs have to be very carefully studied and seen how they have performed during the adverse period in the banking and financial services industry, only those who have stood the test of time and who have survived the crisis pretty well, should be favoured.
Two names come to mind –
and . They did pretty well during the IL&FS crisis and the pandemic as well and these companies are growing at industry leading standards and have good systems in terms of managing their risk as well.
One could have a trading opportunity in microfinance companies like Credit Access which has done exceptionally well and there are a few pockets like home finance where a new listing, Aptus Home, has done very well. Then there is Aavas Finance, which also has done decently well over the past few quarters or so.
But the mantra has to be extreme selectivity when it comes to NBFCs but they have a decent business case and NBFCs are here to stay but the environment and their operations can be a bit more volatile but will eventually add a lot of value if the business is managed well.
There is a very interesting report from Morgan Stanley on Tata Chemicals. They are bullish on their core business – soda ash and they also feel that could be a pure play on battery manufacturing. If one has to be on EV as a trend and as a megatrend for this decade, what is the best way to participate here?
Auto ancillary, no doubt about that, especially companies which are not engaged in engine parts. I can name a few; Minda Corp,
, Montherson Sumi, Sona BLW. These are all new age auto ancillary companies and they are focussed on value added products, EV and the non EV space as well. They are more into electronics, entertainment, security, safety and these will be part of any vehicle – electric as well as engine power.
These companies are gaining wallet share, market share and more and more of their product content is going into the new age vehicles. I am very positive about this set of companies and there could be a few others as well.
Eventually, as the world moves towards EVs, they will derive about 30-40-60% of their revenues from EVs and they would have no problem when the actual transition takes place from engine vehicles to EVs. The valuations are reasonable, managements are very aggressive over there, they are doing acquisitions from time to time so if you want to play the EV story, the EV investment theme then this is the best way to play them.
Tata Chemicals and a few other companies are focussing on battery manufacturing but those business models are still untested and the battery technology is also undergoing a lot of evolution at this point of time. Some battery technology will turn out to be the winner over there but what these auto ancillary companies are manufacturing will never go out of fashion or will never get redundant.
The best way to play the EV story would be through the auto ancillary and not through upcoming battery manufacturers. One can add
to that list but more through the ancillary companies. Then there are the OEMs which have got their own subsidiary companies which are in EVs. But that is another story altogether.
We are happy to hear the story.
One of the key things we spoke about Tata Motors was the way they have spun off the EV business and what value has got created over there and then for a PE investor as well. In M&M also, something similar has happened and eventually some other auto manufacturers also will do it.
Eventually when the value created over there gets unlocked, that benefit will percolate to the minority shareholders. In a way, I would say that the entire value has not yet got captured in the prices but that is more of a long term story.
One major risk factor is that one does not really know which OEM is going to really succeed. Globally we know Tesla is the ultimate when it comes to EVs and there are many challenges but nobody comes as close and Tesla is not going to come to India nor will you be able to import Teslas into India. So in the Indian scenario, we do not really know which EV company, especially on the passenger vehicle side, is going to be the real winner.
The actual process gets more complicated when it comes to two-wheelers as well because we have Ola Electric and many other smaller PE backed players. When PE backed players come into play, they are able to afford losses for many quarters and many years. That certainly will have a negative impact on the listed two-wheeler companies. So, it is a bit complicated and one needs to have all eyes on this entire space if you want to really bet on the right stocks over there but a more effective way would be to ride the EV wave through the auto ancillary companies.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)