They say that good news and good price rarely come together. Right now, news is terrible and horrible. Have prices become good?
We are flat for the year and so I do not think the prices are as great as we are making out the news to be. At least, my broad view would be that 2022 is a tough year, protect your capital, be in stocks where you are sure about the earnings; concept stocks and price to sales and some other random multiples can be avoided.
Finally, it is going to be the earnings that will protect the stock and even that may not help the stock but at least the damage may be much lesser. My broad view is that it is tough and there are a lot of risks – global, interest rates, inflation – the list goes on. Plus the fact that the market has actually rallied very smartly in the last two years and will need a breather. We do not know the exact reason. Some of it is paying out right now. It is better to be safe right now and that is my view. I am sure others will have different views. That is how we are constructing our portfolio for 22.
What are you doing with your portfolio? Where are you taking chips off the table? Where are you moving from high growth to value or from less risk to more defensive?
We have been doing that over the last six-eight months moving more to value, especially in the financial space. We have been very long on PSU banks. Look at their performance in the last one year; they have hands’ down beaten private sector banks. Not to say, we are bearish on private sector banks. We have a fairly significant exposure in the top three-four private sector banks but we have significantly upped our exposure in the PSU banks and at the cost of say NBFCs or some of the higher risky part of the financial basket.
So, that is one way of doing it. The other thing is wherever there is high growth and high expectation, we have already taken the profits and shifted to stocks where the earnings are slightly better. Metals is one name where we are very bullish on the non-ferrous segment in particular and the list goes on. In every sector, there is something or the other where one can mitigate the risk but that is not to say that if the markets were to have a sharp correction, these will hold. But they will possibly hold slightly better than many of the other stocks.
What about IT, we have seen the IT stocks come off considerably from their life-time highs.
IT is a sector where one has to be very stock specific. We cannot broad base as we are seeing a divergence in performance between the stocks. I would be underweight IT, but specifically overweight in certain stocks where the earnings visibility is very strong. One should keep in mind that IT in general has been a bit cyclical if one looks at 10-year performance. It is not as secular as it was in the past. One has to play this according to the cycle and how the valuations of the stocks are playing out. We are broadly underweight IT but we would be long on specific stocks where we think there is strong earnings momentum.
Would that be the blue chips over the midcap IT space? Also, we had seen autos make a move towards the end of last year. The big deal by Tata Motors had a rub-off effect. How would you also approach that space now?
In IT, it is a mix of broad largecap and the midcap and in the autos, I would have to split the autos into two-wheelers, passenger vehicles and commercial vehicles and possibly even tractors. On two-wheelers, we are significantly underweight. There is a slowdown in rural India plus the fact that in India we think that when EVs actually play out, it will be the two-wheelers which will first be off the block. It will take some time for passenger vehicles and for the other EVs to play out in the market because of the charging infrastructure. For a two- wheeler, it is very easy, one can charge at home.
Even some of those fears are playing out. People are deferring their purchases because there is a lot of buzz about EV scooters in particular and that is the segment we are very light on right now. The commercial vehicle part looks very interesting because we are seeing increased capex by the government. We are seeing demand picking up. There will be some lull in between because of some of the Covid-related issues but in general, that is the space which looks interesting.
There are also issues with respect to supply as far as passenger vehicles are concerned. Those supply issues will take some time to get sorted out. The commercial vehicle looks the best in the auto right now and that is where we would be putting our bets.
Given that the overall PAT growth on a free float basis has been quite robust on a year on year basis at 23%, how are you looking at the earnings trajectory that we have witnessed so far? Do any specific sectors that stand out?
As far as earnings is concerned, there is a general belief that January has been very soft thanks to Omicron. I travelled extensively last month and most malls and other places of tourist interest were literally empty. So the feedback we are getting on the ground is that January has been very soft and we will have to keep that also in mind that we saw a reasonably good quarter as far as the December quarter is concerned. But having said that, a lot of it is already priced in. Also if you bifurcate the earnings, you will see that many of the companies are facing EBITDA margin pressure because of the way commodity prices have moved.
The surprises to a large extent have also come from the financial space where we believe that the provisioning numbers over the next 18 months would significantly come down and private sector banks and PSUs in particular will significantly benefit and their earnings numbers will look very strong. Commodity is the other segment. Obviously, the way commodity prices have moved has shown a very strong earnings trajectory and it has been a mixed bag. On an overall basis we have done well but there have been a lot of misses in between because of the commodity prices and the cost pressures that companies are seeing in particular.
When you say it is time to protect capital, stay on defensives, is it time to sit on unusually high amount of cash? Would you say one should sit on 15-20% cash because it could be a bad year like 2008 or an outlier like 2013 or 2014?
As a house and as a family office, we have the freedom to sit on some amount of cash which is higher than normal but for most fund houses, that maybe a difficult proposition. I have been on the other side and I know that it is not easy to sit on 15% cash. One will have to answer too many questions. So the best way for people who have benchmark and peer group, is to go into defensives.
But we as a house or an individual can easily go into a little bit of higher cash but if somebody is in a SIP environment, then this is how the costing gets averaged and one invests over a period of time and so get the ups and the downs and over a period, start making money.
But as a house with large exposures on the market, there are tactical changes that one makes to portfolios and the signs for this were there since October-November. It is not as if a lot of the headwinds that we are talking about are new and have cropped up suddenly. It has very much been there. The market has given a chance to people who want to take a different view, enough opportunity to move to a different portfolio strategy or to go into cash.
One of the sectors which you have liked as a house is telecom and given the consolidation that is happening to telecom tariff, this is one sector where macros will not change. This is one sector where high oil prices will not affect consumption patterns. Are you still bullish on telecom?
Yes. So this is one of the segments where we are extremely bullish and you put out exactly the reasons why we should be bullish. But I will just put a perspective on the numbers. If one looks at the mobility revenues, five years back, the industry was talking about Rs 2 lakh crore roughly give and take a few thousand crores here and there.
If I annualise the last four quarters, we are roughly at Rs 1,50,000-1,60,000 crore and if you take the last five years for the telecom company and for the customer, the data volumes that we are consuming is up at least 50 to 100 times. The minutes of usage have gone up by about 15-20% and in general the other fringe freebies that we start to get like usage of some of the OTT apps and stuff like that does not warrant the fact that the industry has actually lost Rs 40,000 crore of revenue during the period as there has been ultra high competition from one particular player.
As this normalises, the Rs 40,000 crore which comes back to the industry in the next two, three quarters gets significantly distributed between maybe the top two players. We just have two and a half players left now and it is up to your guess to figure out how you want to give valuation for some of these.
We expect to see a Rs 200 ARPU very soon and once we see some traction on ARPU, this is one segment which is insulated to Covid or some geopolitical issues. And if I look at valuations for the segment, it looks reasonably in the average right now. At no point can we say that it is at the higher end of the bracket. So we remain extremely bullish on the segment. This is one of the segments we could use to protect capital and to also make some money.
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