In June, we have seen stark outperformance from the broader markets which gained nearly 5% while the front liners have just about put on 1% or so. How are you looking at the opportunity within the mid and the small caps and what are you advising investors?
Yes, there is a lot of momentum in the broader market and given the fact that of late, even the FII flow has been a bit patchy, the focus would be more from the retail side and they would tend to focus on the midcap and small cap names.
Given that there is momentum even in terms of earnings with the unlock playing out pretty well, the broader market theme would fit into the current scheme of things. We have been highlighting some of the midcap names, particularly consumer electronic names like Crompton Consumer,
and cement stocks like . We also like in this space and even brokerage stocks like . We have seen a bit of a dip in the volume but overall, the momentum would continue to favour some of these pockets.
What is your outlook on the latest petchem investments by and the JV with the Abu Dhabi National Oil Company?
The oil to chemicals (O2C) part of the business is where people are not that confident about how the numbers would look over the next few quarters. The focus is more on the retail and the digital part or the Jio part of it. But given that the crude prices have really gone up and spreads will get better over the next two-three quarters, some incremental data points on the chemical part and O2C could bring the action back into Reliance. I am not too sure about exactly what would be the investment and incremental trigger that it can bring, but at this price point Reliance definitely looks quite positive.
All eyes are on the auto space and it is going to be critical to see whether the rural end of the market recovers or not. What M&M and Escorts deliver for the month gone is going to be the key I guess?
We did our channel check for June and what is coming out from June is that the passenger vehicles and tractors would have a 6% kind of a CAGR and they are the only segments where the volumes are going to be higher than 2019 levels. All other segments would have a materially lower number in terms of CAGR. The two-wheelers are the worst impacted as the Second Wave has affected the rural and the semi-urban markets more.
If one really wants to play the monthly auto numbers, then it would make sense to play through some of the tractor names like Escorts and Mahindra & Mahindra and to some extent through Maruti.
We saw some fantastic numbers coming in from Finolex Cables. Profit is up 2.5 times in Q4. Is there any other earnings or performance that has really surprised you?
We do not cover Finolex Cables and so I would not have any specific inputs there but we need to see the broader markets, which are the names where you can see a good traction in this particular quarter given that we had about one and a half months’ lockdown and the midcap space is doing much better than the largecaps and the valuations are higher. The companies will have to really justify that in terms of performance.
The June quarter could throw some good surprises in terms of companies which are really performing to match the price expectations. It is time to focus on some of the large cap names at this point of time given the trend that the larger companies are getting even larger and the visibility and the comfort factor is far greater than chasing those midcap names where there is not much clarity on the growth visibility.
Among the financials, we are starting to see a little bit of a churn, even among the preferred heavyweights. Would you perhaps change between Kotak and HDFC, bring in SBI if you do not already have it in the portfolio, how would you mix things up?
I would like to highlight corporate lenders. So names like ICICI, Axis, State Bank in last three months have outperformed the HDFCs and the Kotaks of the world by a handsome margin. We think that over the next three to five years, that trend will continue. Also, the valuation comfort is there, the incremental growth looks better for the corporate lenders.
Secondly, this entire amount of about Rs 9000-9500 crore which has come back from the enforcement agencies to the PSU banks, brings an element of comfort that even if you have been defrauded and the entire NCLT procedure is involved, at some point, the money is coming back and the regulatory framework has become far stronger. So, the corporate cycle would become a little better given that verdict and that can help rerate SBI and some of the other PSU banks.
The privatisation drive is picking up steam. What is your outlook on some of these rail related, defence related PSUs and what do you make of the prospects of privatisation?
Names like BEML would definitely be of interest to investors. This is a company with Rs 6,000-6,500 crore market cap which makes rail coaches, defence-related and mining equipment. Once there is a strategic divestment, depending upon who the buyer is, there can be a significant re-rating for the company.
Similarly, in names like Concor, if a good MNC player or big domestic player comes in, then there can be a big re-rating as well. There is a lot of room in terms of re-rating in the PSU names. However, the timeframe for completion of such divestment has to be kept in mind as we have seen time and again that it can be painful depending upon the market volatility. But with a serious one-two year kind of a timeframe, these are very interesting opportunities.
What are you making of the impact of the Second Wave in terms of consumer patterns and demands and how is it that you are looking at the entire FMCG basket in light of this?
We have not really seen any meaningful impact on the FMCG names though in certain pockets, the focus on rural and two tier, three tier towns is higher like for example auto, two-wheelers, etc, and here the impact has been larger. Our interaction with the consumer or FMCG companies show there has not been any severe impact per se. At the same time, some of the companies like Marico, HUL, Godrej Consumer have taken price hikes. Also some of the raw material prices have actually come off, particularly in palm oil and certain other items. At least in the near term, there may be a case of some margin improvement though it is very difficult to figure out how sustainable it would be.