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It has been a reasonably good recovery from the kind of sell-off that we had witnessed in March. So to that extent, the rally in April has provided some relief. Obviously, this rally has been driven more by a bounceback and some of the liquidity infusion measures which central banks world over have taken. I think in India, even though essentially the RBI has done a fantastic job in terms of providing a tremendous amount of liquidity, clearly going forward from here, this is essentially the kind of level or the range which is not going to be very easy for the market to traverse. This is essentially going to be relatively difficult terrain to move forward because clearly it looks like that there may not be a complete opening of the lockdown and it is going to be a phased out one. It looks like that as most of the urban centres will probably have lockdown in some form or the other. That is essentially what the indications are. So we will have to wait and see how soon the exit really happens.
Clearly the first quarter is going to end up being a very very challenging quarter. So what looked like some kind of pain just for the initial weeks of April will probably spill over into May as well and that will surely impact Q1 performance of both companies as well as the GDP at an aggregate level. So clearly yes, what we need to really watch out for is essentially how soon the exit from the lockdown happens and that is going to be the most important event.
In addition to that, of course, things like the economic stimulus, what sectors the stimulus is focussed on, the quantum, the time period will clearly be some of the things to really watch out for and that will essentially decide the course of the markets in the very short term.
While we await any news flow on the economic package or for that matter news on lockdown, do you think there are niggling worries like the episode with Franklin. I know it may be an isolated case but that definitely opens Pandora’s box on what happens to retail investors. Do they now begin a series of redemptions across other debt funds as well and would it at all trickle in into some of the equity schemes too?
Clearly the episode of last Friday has been very unfortunate. I think it comes in again at probably the worst possible time frame. This is essentially the time in which the confidence in the financial system should be intact. And I think all that we can hope for right now is for this episode to not spill over into similar schemes or other AMCs or for it to not spill over into the equity side.
Our sense is that broadly yes, the pain on the credit funds segment of the mutual fund industry continues but a lot of investors there or bulk of the investments there would essentially be from the high net worth individuals or the super high net worth individuals. But it is very unlikely that this will spill over into the equity side. That I think is very unlikely. I think investors are fully conscious and aware that these are segregated products; these are different asset classes. So it is very unlikely that this can spill over into the equity mutual fund side as well.
As an investor then what is it that you have done in the last month-month and a half? How is it that in a time like this when you are seeing just about everything go kaput around you do you maintain your sanity and what is it that you do as an investor in this market now?
These are times for equanimity. These are times to be very careful and very prudent. It is important that you really kind of identify the opportunities and the individual stock investment cases on a very selective basis. This is essentially not the kind of usual corrections or the usual crashes that we have seen in the past. This essentially has been a correction which is getting driven by the impact on the real economy and I still think it is very premature to completely assess the impact on the real economy and we really do not know whether essentially we are going to have basically an extended degrowth or not and I think that becomes very very important.
It also looks kind of a high probability that the next few months will remain challenging; they will remain volatile. So I think it does not make real sense to get carried away with some kind of pullbacks in the market. We are still holding some bit of cash that we have in our portfolios. We are also looking at some of the rallies to essentially do the pullover exit; some of the position that we think could potentially underperform going forward and continue to be more constructive and watch out for pockets like in the healthcare sector, life insurance, general insurance sector, pharmaceuticals, consumer, consumer staples, health and wellness. These are clearly the bunch of opportunities that we are getting even more and more constructive about and I think we would probably use any corrections to still load up around these pockets of opportunities in the marketplace.
Would it be a selective approach though or more of a basket buying when it comes to pharma as well as the allied healthcare space?
It will have to be a very selective approach. This is essentially because especially in areas like pharma every company has its own growth strategy. Yes, in the initial leg of an up move, you see all kinds of companies move up with the name of pharma or life sciences attached to it but clearly, one has to be very careful. Of course, there has been some bit of rally in stock prices as well and maybe a lot of optimism is getting factored in. Keep in mind that some of the pharma companies will also have supply chain-related issues. Some of them could have had disruptions as well. They do not have a problem of demand but they could probably have had problems of supply and logistics; so one has to be very very careful and not get too carried away.
One also has to kind of look at the geographical distribution of their revenues; whether it is essentially India-centric, is it centred towards the US and other regulated markets or is it around the rest of world markets or is it around formulations and API mix. So to that extent I would probably say that it is one of the most diverse and complex sectors to be in and therefore, one cannot really take a complete one sector view but one will have to be very very selective about the individual opportunities.
There is another thing I would like to say. I think a few days or few weeks back, there was a lot of enthusiasm around the hydroxychloroquine but what one is already beginning to hear is that the USFDA had already sounded a word of caution in terms of uncheck use of hydroxychloroquine and I think a lot of stocks had even buzzed around that and moved up around that. So one has to be very careful and not to get carried away and probably use some corrections in this to invest into very specific companies in this space.
In the meantime, of course, we have been very positive about some of the consumer companies which are again into nutrition, personal care, and wellness segments. I think right now it is a much much more robust and sustainable opportunity and one should basically start looking at names in them, which are not so much prescription-driven but are also essentially OTC-driven. So I think that is the way to look at it.
In addition to that health insurance again is a very interesting opportunity and clearly there are reports that even half the population still does not have the desired level of health insurance and that is one one sector which will end up probably being a significantly larger beneficiary of the current episode. So I think, yes, there are different ways to play health and wellness and one has to be very selective.
You monitor the IT sector very closely. What is it that you have made of the commentary that the management has set out? While TCS managed to stick ground with its guidance and said that they have visibility by the calendar year end by December, Infy on the same hand said that we will provide guidance once they have clarity and they are saying that they are unable to give any guidance this time around; be it on margins or for that matter the revenues. Do you think it is inevitable that some of the IT companies will face the heat because of the global slowdown post Covid? Will those revisions in client spends and client orders actually evaporate?
The best way to really look at the IT services sector is to really see what happened during the global financial crisis in 2008-2009. Clearly back then as well, the centre on a very aggregate basis did essentially get impacted and for probably a quarter or two. Even then they basically had probably a de-growth in their revenues in dollar terms. But, of course, at that point of time the depreciation of the Indian rupee and the strength of the dollar was so stark that by and large most of them ended up essentially gaining much more with that depreciation of the rupee. This time around as well, the IT companies have been relatively prudent in refraining from giving any specific guidance, leaving probably an exception here or there and therefore, the next one or two quarters are going to be very challenging for them.
I clearly think that I would be surprised if they do not have a single digit degrowth out there. But keep in mind that I do not think it is kind of a permanent loss of business. There are a couple of silver linings out there. Number one, if we really look at the deal wins that some of these companies have had in the quarter ended March, these deal wins have been fantastic and therefore, that kind of in a way brings optimism for the future that yes, the next two quarters or the first half of this financial year is going to be challenging for them from a revenue point of view. But beyond that, spending will come back. They have the deal wins with them and it is just a matter of time before essentially the revenue starts ticking in. So clearly for the next two quarters, it is going to be challenging. But beyond that, the prospects again look very good and therefore, long-term investors would want to use the dips in the first two quarters or dips or further correction in stock prices to identify the winners in a post-Covid world and that is what we have to keep in mind.
Keep in mind also during the GFC crisis of 2008-2009 a lot of these stocks came down to very-very attractive valuations and I think that is what one has to basically look at that look for opportunities where really there is scale, there is efficiency and the valuations become so attractive that obviously from a slightly medium term perspective the risk reward hugely favorable in your side. So I think short-term one should be guarded, one should be careful for the technology sector but I think beyond the next two or three quarters they would recover and probably back on to their growth trajectory.
Besides staples, the one thing that none of us can live without during this lockdown and these times actually is clearly telecom. Now with the Facebook deal, clearly the sector has got this renewed lease of energy. Do you think that this has to be part of your core portfolio; either Reliance or Bharti or even for that matter Idea, assuming that you do not think that the sector is still headed towards a duopoly?
There are two things here and I think it is probably a bit of the reverse of what I just kind of alluded to on the technology side; that probably for the next two quarters this is going to be a very-very robust sector because essentially they probably are the most immune or the least affected by the slowdown. Data consumption continues to be strong and mobile usage continues to be kind of unchanged. So to that extent, the next two quarters should be pretty strong or robust for the sector as a whole.
The recent investment by Facebook into Reliance is a huge positive. I think it speaks volumes about both the potential of India and essentially the capabilities that Reliance Industries and Jio has built. So to that extent, it is a huge-huge positive. What is very-very interesting in the case of the Reliance-Facebook deal is essentially how this partnership evolves and goes beyond just telecom and gets into consumer technology. That I think is essentially the ultimate intent of this partnership. And so to that, extent between the two, I probably would be more positive about owning Reliance Industries versus Bharti as I think Bharti will probably remain a pure telecom play whereas Reliance Industries gives you the ability to look at it as more as a retail play, as a consumer play and finally also as a consumer technology play.
It clearly offers some kind of an unprecedented opportunity that it is addressing for the future. I mean, of course, of late the stock has done extremely well but maybe I think for really long term investors, one should keep in mind that this is a fantastic partnership which is going to address a huge scalable multibillion dollar opportunity and maybe be constructive on it when there are price declines because yes, of course, they will also be getting impacted by the fall in crude oil prices and therefore impact on refining margins. So there would be some opportunities down the line in price terms to get more constructive on Reliance. So yes, as pure telecom I still think I would avoid it from a long-term perspective because the sector still continues to be regulated and things of that kind and it is almost a completely penetrated sector. So I would probably avoid a standalone telecom play and be more constructive on a consumer technology play.
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