Although there may be two holidays this week, it is a pretty critical one. You have that surprise move by OPEC, RBI policy, the cue for banking updates and of course reports trickling in on the IT previews. What is it that you would like to start off with?
March ended well for most of the global markets as people looked through the entire banking crisis that played out at the beginning of the month. So things seem to have stabilised like you rightly said that the OPEC move has created an upward move in oil prices in the near term.
I think that would slow down the move of the markets for a few days but indirectly markets are pretty well placed. This should not impact the overall outlook for equities unless and until crude prices just shoot up above $100 so which is not the base case because significant surplus capacity is getting created with all these cuts.
So that by itself creates a scenario where oil prices do not move up beyond a point of time. So things are reasonably placed, like you said and IT companies obviously will start reporting results next to next week onwards. So that will be interesting to watch because that is where uncertainty prevails about the growth outlook for the current financial year.
Surprisingly some of the midcap IT stocks are already sitting at their 52-week highs. We were looking at the performance of KPIT Tech although there is a brokerage stating that the best is already baked in, signed etc. These stocks are still in a dizzy.
KPIT had a different story going for it because of their work on the EV automation side and the kind of order flows they were getting.
I think that is on a different plane and that is why it has been one of the outliers. Some companies are more speculative, so there we do not really need to comment on too much.
But as a broad theme, IT has not done well. There will always be some exceptions like initially we saw something like Tata Elxsi do very well then the rest of the IT space was not doing well and then it fell 40-50% from the top.
Overall IT cycle might continue to do well. So KPIT has done well. Obviously, valuations have gone up higher so it could go through a phase of consolidation. Longer term, it should still do well.
Why are stocks like Britannia, HUL the high flyers in the last one year? I mean, you would imagine that these companies have got hit everywhere; competition, commodity prices, volume growth and lower margins?
I think the reason is very simple that despite all the headwinds a company like Britannia has actually been able to hold on to margins. In fact, they have been able to increase it despite the huge inflation they faced on wheat, milk etc. but some part of it is also because on the wheat side they had some exposures.
And now that wheat prices are possibly correcting, so they might actually ride through this thing. Milk price uptick hurts all these companies so how the pricing power plays out there, we need to see because the hike in milk price has been the highest in the entire food category space.
The reasons why particular companies have done well is because they have done well despite the headwinds and whichever company has done well despite the headwinds, we have seen those stocks do really well.
You have also got some of those defence stocks in the spotlight today. The fact that HAL, BEL have given their order book checks and things seem to be shaping up quite firmly and quite well what is your outlook given the fact that their order book guidance is looking strong and for both of the companies as well, you have seen the revenue growth that has been quite healthy?
Yes, so the defence is a durable story where these companies have been continuously getting good orders but the only thing is that these orders tend to have very long gestation and to that extent people should not suddenly expect that these companies will start going 20-30%. That is not going to happen. It is a slow and steady execution cycle that will play out. And given the fact that the visibility is there for five-six years, the stocks becomes low volatility because of the fact that one, they do not have debt issues. Second, the orders are from the government so to that extent, there are no payment issues. And third, the execution cycle will play out so these stocks continue to be crucial. So after the initial up move of the last two years now they are steady return stocks and will be part of portfolios.
Now what did very well, I think on Friday was Mumbai based real estate companies, the new ready reckoner rates have not been changed, which means the stamp duty rates and the ready reckoner rates which used as a benchmark for real estate at least in the city of Mumbai or Maharashtra, let me put it this way they have not changed. There was a speculation in the market that that could be changed, but thankfully that has not been changed. What it means that it is good news for Maharashtra based real estate companies, which are some of those Maharashtra and Mumbai based real estate companies, Lodha also known as Macrotech Developers. You have got Kolte Patil large land bank in Pune and in Bombay. You have got Oberoi very large land bank concentrated in and around Bombay. Godrej, Hallmark prop projects in Bombay, how positive is this?
Ready reckoner rate moving up was not the expectation in any case I think because it is not that real estate prices have actually gone up. So real estate deals have gone up, sales are happening, but prices are more or less steady so to that extent I do not think that there was an expectation also that it should be going up. Overall, this year will be more interesting to see because those tax gains, tax set off above 10 crores of profits was eliminated in the budget. We saw a lot of large ticket deals happening prior to the deadline of 31st March and that will boost the performance of many of these companies for this quarter which is fast. But then how do these high value deals play out this financial year, especially when rates have also gone up will be interesting to see. Overall, I would think that as a basket real estate seems to be fairly valued.
What are you buying as a basket? I am not talking about shopping basket, I am talking about market basket?
I believe that Indian banks are very well placed. So Axis Bank, ICICI Bank is something which we keep on buying continuously among other opportunities. Reliance looks interesting from these levels because it has got beaten down so much for a 10-15% kind of gain. L&T will continue to do well as a steady performer and some consumer names, I think on valuations look interesting. So Bata is something which we have been accumulating because that has got beaten down and it has not recovered at all so that gives an opportunity to buy at lower levels. And on the midcap side companies like VA Tech Wabag’s growth outlook remains very strong. It still trades at around 10 times current year earnings with strong cash flow generation that is something which I like.
I want to go back to that point on crude and we can argue both ways, argument number one, pure desperation by OPEC because they are losing market share; Russian oil has entered into side deals with countries like India and their oil supply has not got disrupted. Second, they also feel that the demand is getting punctured, China is not consuming as they were expected to consume after opening up, which means OPEC in a sense is telling you a clear message that commodity prices have peaked out, demand has peaked out and inflation will come out.
Yes, so there was an expectation like you rightly said that once China opens up post its COVID restrictions, we will see a revival in fuel demand out there, but I think first three months data shows that that has not really happened.
So, both aspects are right. They are getting desperate for higher revenue in the short term because of the fact they realise that in 5-10 years as EVs become more mainstream, the demand will only moderate instead of increasing, so they want to get as much as revenue now as possible. So, the challenge for other countries is only when crude actually goes above 90-95 and sustains there, so a 5-6% move is perfectly fine because of the fact that crude actually fell so much and reached a 15-month low last month before now reviving with these moves. So, overall, let us see how it goes. It is very tough to predict crude oil prices, but it is really a desperate measure.
What is your take on this entire gas space as a whole, going to be in the spotlight. That is your outlook?
Unfortunately, I do not invest in this space wherever there is so much of government intervention and we need to depend on so much tweaking and decisions by the government for the fundamentals to change on either ways.
You have liked quite a few banks, from IndusInd, Axis, ICICI to for that matter SBI as well. But if you had to add positions at the current levels, which is that one stock that you would pick out from banks?
IndusInd is something which we have not bought but I think from the banks I believe Axis and ICICI are best positioned now from a risk reward standpoint taking into account the valuations. Growth might be good for other banks also, but from purely a valuation to growth paradigm, I believe these two look better to me.