what to buy: Jinesh Gopani on what your post-Covid portfolio should look like
Is this a market which is telling you that a strong economy, strong earnings growth and strong margin expansion is coming or is it telling you enough, it’s time to get careful now?
One always needs to be cautious because something or the other comes and hits you. There are always some kind of Black Swan events every one and a half years — from demonetisation to GST to IL&FS crisis and now Covid — a once in a 100-year kind of an event . Having said that, post Covid, it seems the recovery in the organised space is much faster and job losses are relatively low in the organised space.
Most of the organised listed companies have been able to demonstrate earnings capability and visibility and are also gaining market share. That is where markets have been on a tear and adding to that is a good, pro-growth, no nonsense Budget. The government means business. The focus has shifted to a pro-growth mode and if you have a 14% kind of a nominal GDP growth this year and from there on, around 10-11% kind of a nominal GDP growth for another two years, you are in for a good run.
However, we should be cautious, if at all there are any Covid related further shocks or any kind of a Black Swan event globally. A lot of money has come into the markets. The markets are up 12% and in the cash market, there has been a buying worth at least Rs 20,000 crore by the FIIs and so markets are up. We are getting a fair share of flows in the emerging markets. Some of the reports talk about how around $250 -300 billion of flows can emerge over the next 12-15 months and that should also benefit us. The flows can be back-ended or front-ended depending on how the situation arises. So, volatility will be our friend. It is always better to be cautious than be over confident on the markets.
If the bond yields start spiking globally, that could be a big wrinkle or a challenge in terms of our assumptions of low yields, low rates and lots of liquidity. Do you agree?
Yes. That is what I am trying to say. If there are any significant shocks and the US 10-year goes up dramatically, then there would be a shock in the market and we will see one leg of outflow happening. Having said that, we still have to see whether it really holds on to this level or breaks past and goes above or if it again tapers down. Over a period of time, we will see how the Federal Reserve is able to manage the yields because it will hurt them also at some point of time. So unless and until it is a demand driven excessive inflation and the yields start going up significantly, then there is a cause of worry. However, at this juncture, it does not look like that type of a scenario. But it is better to be cautious at the levels where we are and at the valuations where we are, but there is no need to panic.
What has been the big change in your portfolio orientation this year?
During Covid, there was a lot of fear about what will happen to the economy. I had come on the channel and we had spoken about financials as a sector because it is a leverage play. There has been a dramatic upturn in terms of both the numbers and the ability of some private sector banks and NBFCs to manage the asset quality better, now that we are getting into a growth mode and the asset quality issues are less.
We have been overweight on financials as a sector. We had trimmed it down during Covid but we had gone investing once we understood how the asset quality issues are shaping up. Also after the Budget, one of the sectors which can really do well over a two-three-year period is financials. India is an under-penetrated market and there is a lot of scope for good players to be in. Also as tier two, tier three, tier four players go sideways for various reasons, the top four-five banks and top two-three NBFCs should gain market share.
So a clear good run is available there unless there is a shock in the economy. The financial sector is a proxy to the economy. Second, there is a lot of thrust going into infrastructure. However, it will take time for this infrastructure story to play out but you can play it either through the cement sector or steel sector or capital goods or any other infra proxies which are available. It could be a good story over the next two to three years.
Technology as a space looks pretty strong globally also. We continue to invest more there. So these are the broad three sectors which look promising over a period of time. Also, ultimately consumption is an evergreen story and one can pick stocks in those sectors.
Coming to tech stocks, while you still have a substantial holding, there has also been some profit booking in heavyweights like TCS, Infosys. Is there a strategy here? Is it just profit booking or are you looking for slightly more mid-tier names? Also what about telecom?
Post Covid, there has been a significant ramp up in order books for all the companies. Technology would be in a sweet spot at least for the next 18 to 24 months. Digitisation, technology, cloud, AI, machine learning — all are coming together and helping many enterprises to ensure that business survival is in place and that is where Indian technology companies, which are more service system aggregators are benefiting out of it. Maybe, we can expect double digit growth for the next two years in the technology space.
Telecom frankly is a two-player market. We have some of these stories in some of the portfolios but we will have to see how the game plays out in terms of hike in tariffs hikes or rise in ARPUs and also the coming auction pricing. This is a high capital guzzler sector. Normally, we prefer more free cash flow driven companies. We are still evaluating.
What do you think will be the front runners when it comes to the infra play and also some of the proxy plays to that?
We will have to see how the capex comes out, how fast the implementation happens and the execution starts. Post Budget, it is more of a euphoria and there is a focus of the government on the infrastructure side, but really it has to now get into a project mode, implementation mode and the execution mode.
There is not one sector which will do very well and the other infra proxies might not do well. It will be all across. One will have to pick stocks depending on the sectors where one is comfortable depending on managements and where corporate governance issues are less; any company which helps build homes or roads or ports or bridges. These will be product companies in the capital goods space. There are cement companies who will really benefit.
If one wants to play momentum, it can be played through the steel sector and there are other niche sectors related to building materials. If the balance sheet of the company is strong, especially debt-free companies, that’s where the maximum gain would be.
In the auto sector, would you say tyre companies and some of the part manufacturers are still good to go, irrespective of the invent of electrical vehicles (EV)?
It depends on how many technology plays are available in India. There are very few players which can really scale in the auto ancillary space and talk about either technology or mundane stuff or just manufacturing local parts and sending it to ICE players as well as the EV players. There are very few real breakthrough technology companies available in India to play on the EV side. It is still a work in progress. Hopefully, some of the IPOs will open up opportunities to play EV space in a big way, but generally it is a big disruption which is coming. I do not know whether it will take five years, 10 year or 20 years, but it is a theme which is at play and along with ESG as a process, getting more and more important across the stakeholders.
People are opting to buy cleaner, green fuel cars than opting for diesel cars. So, a big disruption is at play. It happens slowly, but the more important part is to understand what ancillaries or what auto ancillaries would get de-rated. That is more important than looking at the opportunity because there will be many auto ancillaries which we feel might not be able to stay on course and as a business model, over a period of time, might get de-rated if they do not change their game fast.
It is better to look for companies in that space which would eventually be a non-starter or a de-rating candidate and just take it out from the portfolio than look for new because in India, there are not many companies available to play if you want to really play in a big way.
Tatas are looking at a big pie of Big Basket and a valuation of Rs 9,500-crore-odd is being talked about, directly competing with the likes of Reliance Retail as well as D-Mart to a certain degree. Is there scope for smaller players as well to get a piece of the pie?
The global experience has been that there are always five to six players in the retail space. Two or three will be small niche players and two, three will be big giants. It is not like telecom where globally it is a two or three-player market. Retail is a very big pie. India thrives on consumption. In retail, it is becoming more important for companies to move online and that’s why some of the offline companies have moved to an online model or are trying to set up the online model. It requires huge capital initially because the cost of acquisition of customers is very high. So, only the large players who have deep pockets can pull through over a period of time.
It is a great space and lots of opportunities are available. If I remember correctly, only 10-12% of the market is a modern retail market. The rest is still up for grabs and if the customer is ready to move that side armed with smartphones etc. Post Covid, all these themes have become more important at least in some of the top tier cities. It is a long-term story. There is a huge opportunity and if played well, then economics can be pretty good.
