Auto stocks good contra bets from a short-term perspective: Aashish Somaiyaa

What about the market mood? It’s a lot better than what we were perhaps a fortnight back. It has recovered quite a fair bit from the March lows but has that really changed the sentiment on the Street?

Compared to what I have seen over many-many years, the reaction is definitely far more mature and far more measured and I would say that there is a reasonable amount of stability. March numbers are already there for everyone to see. But as far as April is concerned, there will be some logistical issues and there will be some issues related to sourcing business or enabling customers.

So my sense is that inflows would be muted as far as April is concerned. I am not seeing any spike in redemptions on a day to day basis but my sense is that inflows would be muted for sure.

What about the lump sum money? Has that not found its way in the decline or the March lows? Has that completely steered clear and sat on the sidelines?

In the last few days, there have been a lot of interactions with the clients as well as intermediaries and everybody is watching and everybody is keenly tracking market movements but as far as lumpy money is concerned, not everybody can invest large chunks of money 100% digitally. So that is where I was coming from when I said that there will be logistical issues and this is not only just related to the market. In fact when I am saying logistical issues, it is also more about people being able to do transactions or being able to coordinate transactions. So there is that bit of an issue.

If I see the number of retail transactions which are happening digitally, I have seen a spurt up in the last few weeks but when you are asking about lumpy money, I think that apart from watching markets, there is also a logistical challenge. That is how I would put it.

Given the RBI’s commentary today about real estate and NBFCs, do you see an opportunity there? Do you see some relief?

I expect people to be circumspect about these sectors at least for the next three to four months. I am pretty sure that there is some relief from the kind of announcements that are coming through and there is definitely a lot being done to assuage the concerns or to give relief but I think the jury is still out on how the sector fares and that I think we need to watch out. We will know only by July-August-September as to how things really pan out.

All eyes also continue to be on the stimulus. Which are the pockets you feel are most likely to benefit from any announcement that may come in?

See, if you ask me, I would expect something for auto. That is how I would put it. Real estate has not been the favourite sector really but I do see these are the two areas which need maximum support. If one is keeping an eye as far as employment generation and normalisation of activity is concerned, both these sectors have been in the dumps for a variety of reasons over the last two years; maybe real estate slightly longer.

Now I am not an authority or an expert on the real estate front. But if I have to make a bet, I would be more bullish or more positive with the expectations related to auto as a sector. That is how I would put it.

What is your take on earnings? TCS in particular I would like to ask you about. Given the fact that the management has said that the impact of COVID-19 is difficult to predict what they could see in the coming quarters but the scenario they have modelled in the worst case and they will be able to grow from Q3 FY21 onwards. How have you read into the quarterly performance and what has been your take on TCS?

All disclaimers in place because we have a holding in most of our portfolios. I mean I do not invest in stocks myself but I am speaking more from what the mutual funds seem to be owning. So our perspective is positive. We already have money invested out there and as we speak, it is a positive perspective that we have on the bulk of the sector. Actually if you ask me, all the large companies, we are reasonably positive on them and I think what came out of yesterday’s result announcement is encouraging in that sense because there is no correlation between the two directly.

But if you ask me really, a lot of the issues are more related to logistics and getting people on the ground. So my sense is that deal flow and while the existing business continues because a lot of it is digital, I think there is the deal flow and people’s willingness to commit more amidst so much uncertainty. I think that is where the slowness seems to be coming from. My sense is that all efforts related to digitisation, all efforts related to business continuity, a lot of these things will actually get more traction going forward.

If I give you my own example, I have been in the industry for the last 20 years and we have been doing this business continuity kind of simulations every six months. Probably this is the first time I am seeing that we are actually made to use it and I am so glad that everything works. So if you ask me, for all these big IT companies, my sense is that the salience and the growth of business will only go up and right now, I do not think one should read anything into the slowness because apart from business issues, it is just that sheer logistics and sheer willingness to commit amidst uncertainty has taken a bit of a back seat but with a lag affect, there is only growth which is going to accrue to these investors.

Investors are fleeing to safe haven greenback at a time like this and we have seen that result in the currency being at an all-time low near the US, dollar close to 76.8. What about the export-linked sectors? How are you looking at that play in a market like this?

One cannot generalise across all exports because it is also a question of what is the target industry or the target market that they are really aiming at. So if you see, pharma clearly is in tailwinds and not just because of HCQ and a couple of companies associated with that. But on the other hand, if you really see longer term perspective, US businesses’ prospects seem to be on the uptick or at least the prospects seem to have brightened.We have been getting a sense over the last few weeks about better business relationships in parts of the Western world. It seems to be actually playing out if you follow the news flow itself. So pharma is clearly in a tailwind kind of a space for multiple reasons right now because the last four, five years have all been about USFDA actions and pricing controls but I think the clouds seem to be kind of moving right now.

As far as IT is concerned, like I mentioned, company-specific you might find some pluses and minuses but overall, my sense is that barring this one quarter of slowness or uncertainty with a lag effect, there are tailwinds for everybody to see from here on. So at this juncture where the world is amidst uncertainty as far as export is concerned, I would not draw conclusions just based on where the currency is going but I would also kind of pay attention to what are the target markets and what are the individual circumstances that we are facing.

Where do you stand on the private banks? They have been going through a seesaw and, of course, the RBI is doing its bit to ensure ample liquidity. We have seen limited transmission but where do you stand on these banks as we are also trying for a recovery even if it is four months down the line?

It is not the first time that we are going to see an air-pocket as far as the retail side of the banking business is concerned. Or it is not the first time that we are going to go amidst the air-pocket on the unsecured lending. You know we have seen these kinds of patches in, say, 2008 for example. There were certain institutions or certain banks who had great growth in retail, credit cards and secured lending in 2007-2008. And we have a sense of what worked and what did not work. So on that basis, one does not get very pessimistic about what is happening right now.

I mean if you were to talk six months-nine months back, a lot of the private sector banks were actually the safe haven and it was like a forgoing conclusion that they would always do well and they would always deliver. So I can see that kind of one-sided belief has been questioned at this point in time. So I am not in that camp but I would still say that from here on, it is not that these guys do not have this experience; we have seen such a cycle. I think that some of the pessimism is probably overdone. That is one thing to keep in mind.

Second thing to keep in mind is that it is not just about the economy or the NPAs and how things will pan out on the retail front in the next three months. The other thing which one needs to really also look at is that interest rates are kind of going to go down through the floor. That is an exaggeration but literally somewhat like that and there is great pressure from RBI to grow credit. So my sense is that NIMs could be under a bit of declining kind of stress and that is something to watch out for. But I think the strong ones who have a good track record in the past would still continue to be the winners.

As far as NBFCs are concerned, overall as a house, barring one or two cases here and there over the last 12 to 18 months even before we hit this COVID impact, we were quite low in terms of our NBFC exposures and that remains that way but as far as the leading private sector banks are concerned, I would not be too pessimistic. One has to also keep in mind how much the market has already factored in because they lost 40-50% of their market cap in the last few weeks.

Which are some of the pockets which would be a clear avoid at this point?

Anything which needs a heavy amount of financial support and intervention from the governments, all these public private partnerships, long drawn projects, lot of capital intensive stuff, my sense is that that is something which is leveraged. I mean that is classic one-on-one in these kinds of situations that anything which is very capital intensive and highly leveraged is something which would take a backburner.

I do not think many people believe in what I am saying but my past experience tells me that when we get to the other side of this tunnel, what I quoted for banks that rates are under pressure, you see it on the other side of the story. We are going to come out of this with extremely low interest rates and reasonably high liquidity and the global environment which will be kind of benign. So my sense is that anything and everything which has seen demand postponement and depends on availability of credit and attractive interest rates, I would say that I would wager that in the next six months those things will find traction.

So my sense is that a good contra bet would be auto right now and within auto if you ask me, passenger vehicles would make a lot of sense because for various reasons the last 12 to 18 months has seen demand postponement and another air-pocket has been hit in the last few weeks. But when we come out of this on the other side, some of the demand which was postponed will come back and we will also find ourselves in a situation where banks will be just too happy to lend and what is easier than to lend for mortgage is an auto. So you know, if we do not have a massive destruction in the white collar or the urban demand or the salaried class and if we also assume that rural has a less depth of impact, then my sense is that some parts of auto should come back quite strongly in six months.

For FMCG and pharma, you have got support coming in from all quarters. Real estate, autos and the Nifty bank index are up about 3.5%. Media too is packing in a punch and within the broader universe, you have got the indices holding out by nearly 2% or so. Curious about your take within the pharma space. What is the outlook here given the fact that we have seen most of these stocks rallying of late and experts asking whether this is the start of a second major bull run? Would you concur?

A little bit of it is sentimental because pharma is front-end centre and it is like on everybody’s attention and radar but I do not think pharma can be seen as a sector really. It is actually company-specific because they all have different specialisations and practices and markets and expertise. So one has to go stock by stock. But I think that if I were to still insist on taking a broad sector view then I agree that it is seemingly positive and I do not think it has got just to do with COVID-19 and the supply of HCQ or the export of paracetamol or something like that.

I think it has got a lot to do with the fact that the way the winds are blowing; maybe the direction of the winds would change and that is more related to exports markets and the US and the FDA and a slew of clearances coming in the last 7 to 15 days. So that is what has caused the change of mood. So COVID-19 is one thing but what COVID-19 has caused in terms of the second order effect or the change of business dynamics, that is what seems to be encouraging people. The other thing is that it is massively under owned. So what I have seen is that when the market is in a bad mood and when things turn bad, then the over owned stocks start falling amidst lower volumes. On the other hand when the sentiment changes, the under owned stocks start rising amidst low volumes. So I think it is more under owned than anything which is under owned right now and people are probably scrambling to make up for it. So there is a change of business dynamics and I would say it looks positive from here. Also, do not forget that from its previous peak, the pharma index is still 30% to 40% lower than where it used to be about four-five years back. So these are early days I guess.