earning season: Financials likely to drive market this earnings season: Mihir Vora
What have you made of the IT earnings so far? Do you think there is scope for further positive surprises within IT? and Tech M are coming next?
IT results have been a pleasant surprise. In fact, it continues with the trend that we saw in the last couple of quarters, which is that the corporate spending in the US is going all out because of the huge fiscal stimulus they have received. There is consumption demand and companies are feeling good about investing. So, we are seeing better than expected traction in the order books and better than expected top line is reflecting in the results.
Technically, midcaps and the smaller IT companies tend to be more leveraged. So even a couple of good sized orders can make a quarter on quarter, year on year difference in the percentages in terms of growth. We are seeing the continuation of a strong US and strong developed market economies in general and IT companies are benefiting. We just need to watch out for the cost pressures because there has been a sudden rise in demand. Last year, companies were a bit conservative in terms of hiring. We are seeing a sudden scramble for talent. The salaries for good specialised skills are going up dramatically in the last couple of quarters and that is the only thing that I would watch out for in terms of hiring costs and margins. The other lever in terms of cost is travel. Companies have not been allowing travel for a long time now — almost four quarters. That is another expense that might start picking up. But the top line is fine.
Where will the leadership come from in this earnings season? We have seen the precedent set by IT but beyond that, what could surprise positively?
The big sector which can drive the markets is financials. Everybody is waiting for a commentary on how the second wave has impacted the MSME sector, the retail loan segment. So far, the commentary has not been negative but the results will reconfirm that theory. So overall, while financials have held out quite well in spite of the second wave, once the results are out, it will probably be a confirmation of the fact that the private sector banks and NBFCs have handled the stress well and probably we will get a fresh leg in the market.
What are you making of the internet companies hitting the primary market? Zomato is going to close its IPO today. Paytm is coming up next. Where do you stand on the long term prospects of some of these names?
There is a great deal of ambiguity or confusion or lack of relevant benchmarks when one values these companies. To that extent, we are looking at global benchmarks and global historical experiences that we have seen in similar business models because that is the only way to get some kind of reference points. I would not be able to comment on individual company valuations, but if you look at the global benchmarks, the growth rates which are expected, if growth of Indian consumption lasts, then probably some of the valuations may be justified. We are taking it on a case by case basis because there are different business models out there. We cannot generally club them into one big bunch of tech or consumer tech or fintech because they are in very different niche segments. One has to go deep into each and every business model.
What about the entire diagnostic space? This segment has soared on account of the Covid pandemic and there seems to be a lot of potential within this space. What are you spotting within this sector?
We believe this is a space where structural growth is based on the shift from unorganised to organised and within the organised, the large listed players might get a chance to consolidate further. Some of the unlisted companies or privately owned companies who want to encash fast, might actually be up for sale and the balance sheet and the market cap of the listed companies will enable them to generate the resources to be acquired.
I see a lot of M&A in this space. I see a lot of inorganic growth for the listed players and structurally the shift from unorganised to organised should continue. The other lever is that as lifestyles are becoming more stressful and sophisticated, the complexity and the type of tests that are being done are also increasing. People are going for higher value added tests and there the margins are much higher, the pricing power can be much smarter. Those machines and equipment required for conducting those tests can only lie with the large guys and so there is scope for large listed players to grow continuously for the next many years.
Reports indicate that major listed realtors are looking to hike residential prices by about 10% and there is a fairly strong demand as well. This rise in prices is being attributed to the rise in input prices such as cement, steel and so on. How are you looking at some of these companies leveraging this price hike?
On the real estate side, we are more positive on the commercial space because there is clear visibility of demand from the startup ecosystem, the IT, ITES, BPO ecosystem and that is very stable and with global growth coming in that should continue to grow. There are very good opportunities in the commercial space.
In the residential space, I would prefer if the builders go in for volumes rather than value growth because with lower interest rates and interest rates likely to remain at these levels for a long time, as and when the jobs as well as the demand comes back, if prices are kept stable, then volumes can really pick up.
If one starts hiking prices too early, then we may not see traction in volumes. So while there might be some pricing power, it is always better to get the volumes out, especially in markets like Noida, Gurgaon, Mumbai, South of Bombay, the Parel area, where there is a lot of inventory. Builders would rather go for inventory clearance than value.
How are you looking at the entire cement basket? What would you bet on in the midcap space?
I cannot comment on individual stocks but given the overall traction in the rural space, hopefully with the monsoons around the corner and so far things going on track, there should be a demand from rural construction also. While government construction is going on strongly, some pickup in the commercial and residential demand from the urban areas added to the rural uptick, should make for robust demand. Pricing power has been good this year and that should continue.
How are you playing commodities?
In commodities, we take a tactical call really. It is not a one-year or two-year kind of a call. We are tracking the global commodity prices, the supply demand and especially the raw material prices like iron ore etc and then taking a call. A couple of months back, we were overweight on the space but for the last few weeks, it looks like there is some kind of consolidation happening, some correction in some of the bigger commodities. We are more neutral at this point in time.
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