The index is up nearly 14.5% from recent lows and more for individual names. Is it time to trade cautiously?
I think so but I really don’t think we’re going to test the kind of lows we saw around 15,200. I think those were panic lows, but yeah, with the type of upside we have seen, a correction cannot be ruled out. But the range will definitely be higher than what we were trending towards earlier.
Where do you see the bottom of the market? It was 15,100 in June and you don’t expect the markets to go there, but 16,000, 15,500 – where would you put the bottom? We are currently at 17,500?
I think odd 16,000 would be the number the market could go to if it were to correct, but certainly not around 15,000. If you look at it from a fundamental perspective as well, if you go to 24, you’re talking about a profit of over 1000 for the Nifty and then you’re talking about that at about 15 to 15.5 times or so, which for an economy like ours growing at a nominal GDP of 13% to 14% is pretty fair from an evaluation point of view.
I think this is definitely an exceptional buying opportunity, but if we get this correction now, it would be closer to 16,200 from which the market should rebound.
What kind of companies should you look at in such an environment where inflation is likely to subside and rates rise in the near term? Would FMCG be the best play because they bothered high commodity costs and took price hikes to pass that on?
FMCG is a good place to look. However, the only concern about the FMCG pack is that the rural economy continues to be a drag. Even the monsoon has not been evenly distributed this time and the rural economy which was expected to come back thanks to a good monsoon and the festival season could be affected.
“ Back to recommendation stories
Hopefully August and September see the rains return in some form or another but they will clearly benefit from lower prices. The key thing has to be revenue growth and volume growth coming back, that’s where the challenge lies in FMCG games. But it is clear that the sector on which we are most optimistic, regardless of inflation and which should benefit even if inflation is there, is the whole financial package and financial services. We just think that after almost three or four years of pain, this space is very well placed and should benefit from a shift in terms of responsibility for repricing. In that sense, they should see a better margin and see credit growth return.
Just last week, the largest public sector bank reported numbers with credit growth nearing 14%, which is fantastic! The relentless selling the sector has seen over the past 10 months has made valuations very attractive. We are bullish on the overall financial space at present.
What is your first choice in banking and finance? Would you play it through insurance or through private lenders or public lenders?
We like private lenders and they are ahead of the pack. We like some of the area-specific non-banking companies as such and even more, we really like the mortgage space in this area. Lastly, we love the insurance pack it comes with.
Does the fundamentals hint at what might emerge as a leader and beat the ranks of Kotak, or one or even for that matter?
From a valuation perspective, I don’t think any of these tier two or tier three banks are ever going to match the historical valuations they enjoyed prior to 2018.
It is mainly because during this period the big banks have really taken market share, raised funds at low cost in the form of capital inflows or deposits and are the best place to attract the best customers. as such. Tier 2 banks have seen so many sell offs due to the issues they faced from 2018 to 2021 and have undergone some reassessment. We could see them performing better in terms of stock prices just because of the revaluation. Once this phase is over, I continue to believe that the big players will perform and do better.
Between and , what do you like?
We are not talking about specific actions according to our internal policy, but the two sectors as a whole are on the verge of doing well. If you really look at the hospitality industry, the type of room we see today has a lot to do with pent-up travel needs, both on the business and leisure side. I think that’s largely because the industry as a whole has been producing below-par yield ratios for well over a decade or so. There has been hardly any accretion in terms of rooms and as the economy and growth are coming back and India is poised to do well in the next few years, we are witnessing this shortage of bedrooms. Additionally, many companies in this sector have now moved from asset-heavy business models to asset-light business models. The hotel industry as a sector should therefore do very well.
As far as automobiles are concerned, the entire PV segment is doing well. New models are rolling in and whichever company has come up with new models has taken market share. I think it will be interesting to see how the segment leader comes up with the model upgrade that has been lacking for the past couple of years and has resulted in a loss of market share.
We are bullish on both sectors and both have seen gains. I’m probably hoping to see some cooling before we look to build positions there.