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I do not know whether you are missing on something but it seems to be in line with our expectations at least. If you look at what is happening globally, the number of Covid cases seem to be coming under control. If you look at Europe, for example, the number of new cases have come down pretty sharply compared to where they were two to three weeks back. Many parts of Europe are gradually opening up for more economic activities; schools, etc are also being opened up in some of the Western Europe countries. If you look at the US also, the number of cases has now started to decline over the last two to three days compared to about 30,000 cases per day which was the rate before that. So it looks like it is at least coming under some control globally, which is making people hopeful that the economic impact of this may not be as dire as what was expected at one point of time.
It was expected that this COVID situation would pretty much get out of hand, you will have large parts of the economies being shut for an extended period of time; so thankfully that does not seem to be the case. So it is clearly a situation of global risk on sentiment also helped with the fact that many of the central banks have been very supportive in terms of their very loose monetary policies. Many governments have announced huge fiscal measures, anywhere between 3-5% of the GDP and in some cases 10% and in one case even 20%. So that is the kind of monetary and fiscal support one is looking at. So I guess that is rubbing off on India also.
Specifically in India, the number of new cases thankfully seem to be not accelerating. If you look at CDGR of the last four days, it is below 6%; April 15 to 25, the CDGR was more like 8%; April 5 to 15, it was more like 11%. So in a way, the extended lockdown has managed to flatten the curve and the other data point is many districts seem to have been largely unaffected. So the central government, state governments can take the call now for reopening some of these districts for more economic activities. Hopefully we will see that in the next one to two days. So it is just positive sentiments stemming from the fact that the Covid situation seems to be getting under some amount of control or all of us would be talking about it if something else would have happened. We could have perhaps seen a second wave and all but as of now, it looks like it is getting under some control.
What are you advising your clients? Should they remain invested or after a 20% comeback in good largecap stocks, 15-17% comeback in Nifty from the recent lows of 7,500, is it time to book some profits?
It depends on your timeframe. If you are a long-term investor, it is okay; stocks are still quite correctly valued on most parameters and when I say stocks, I would say most stocks. Not all because we have big run ups in some of the consumer staples and pharma names which are now getting into fairly valued territory even on FY22 basis but most others seem to be recently undervalued even after the big run up in the last few days on March 2022 numbers, assuming that we do not see further economic damage and earnings downgrades of an extended COVID situation.
So if that is the case, things look somewhat under control. Over the last two months, we have upgraded as many as 38 stocks. So our call was that some of the stocks corrected significantly; there were more positive calls saying that look, there will be an economic impact, there will be severe earnings impact for a year but March 2022 would be a more normal year and logically one year’s earnings cut should not damage the fair value of any company dramatically. That is the call we have taken so far. Touchwood, it has been working. Given the fact that risk-reward balance is maybe not as favourable as it was a month, month and a half back, we may have to review in some cases. But broadly speaking, I still think there is money to be made in most of the names if you take a 12-24-month timeframe.
Where do you think the economic recovery is going to be the slowest and fastest?
The slowest part is clearly anything to do with investment because as of now, given the damage to the incomes of the households and even the government to a large extent, given the big drop in tax revenues, companies will feel the fear. And also, the sentiment part I would assume the three sub-segments of investment which are government, households and private sector; all three would be very reluctant to spend. So anything to do with investment, whether it is residential real estate for households, whether it is large infrastructure projects for the government or whether it is new capex for the private sector companies, I think that is off the table for the time being. So the demand for capital goods, construction materials will probably recover last.
On where demand could come back fairly quickly and it is assumed that we will get back to a normal situation by end of September in terms of economic activity, I would assume low ticket consumer discretionary items would come back a lot faster; so spaces like consumer durables, low ticket items, even two-wheelers, which is more of a semi urban and rural product, particularly motorcycles. And from whatever we are reading, it seems to be that the Covid impact is pretty limited over there and the economic impact is also somewhat limited. So that could also comeback fairly sharply; maybe even dining in could also start picking up.
Lastly in the same bracket, I would assume global commodities could also come back as global supply demand starts becoming better because until recently there was hardly any demand but as the economy starts gradually opening up, demand will start picking up; capacity utilisation levels will start rising and the supply demand would be better. So pricing and profitability will start improving from trough levels and even that could come back pretty sharply. So that is how I would look at the various buckets of stocks.
So you have stocks where the demand may not be impacted that much, which is traditional consumer staple names, pharma, utilities, telecom to some extent, which are in the first bucket. Second bucket is where the demand will be impacted significantly in the let us say in the last two months and the next two to three months but where demand could also come back a lot faster; they are typically low ticket consumer discretionary that I was talking about. Then we have the segments of the economy where demand is impacted significantly as of now but will also take longer to recover which would typically be large ticket consumer discretionary or investment part.
The universal logic in the world right now is that look there is abundant liquidity which means money will have to come back to emerging markets. Do you think there is merit in buying this good old golden thesis that a lot of money will get printed and money will come back to India and China because they are better off in terms of environment, growth and medical news?
I do not know because as of now the view seems to be that Europe and the US will recover faster than India because they have brought things under control. China is anyway doing fine. But whether a lot of money will go to China, I am not very sure because there are lots of geopolitical issues.
Yes, FPI money may go but I suspect the FDI would be limited. Now coming to India, yes eventually if we have so much liquidity, money will come. I hope it is in the form of not just FPI but more particularly in the form of FDI and that is going to be a lot more meaningful for India in the medium to long term.
The one thing besides staples that one cannot live without is telecom. Suffice to say telecom needs to be a part of one’s core portfolio right now?
That is true. Anyway we had a positive view. I think most people had a positive view in telecom even before the Covid situation simply on the fact that ARPUs are bottoming out in the second half of last year and if you recollect, in early December you had a big increase in rates by all the three large telecom operators. I would assume that would continue because even at current levels of ARPU, it is not as if the industry is very profitable. So logically, I assume ARPUs have to go up a lot higher from where we are. I think it would be more in the range of Rs 100 over the next 15-24 months timeframe because that is the level of ARPU you require for the weakest operator, which is Vodafone Idea at this point of time to be somewhat profitable.
What is your take on the infrastructure sector as a whole? Do you think that they will be bearing the brunt of the lockdown impact far worse than some of the other sectors? What is in store when it comes to earnings, margin contraction?
You must look at various parts of infrastructure. So things like existing operating projects issues will be fine if you have toll roads. I guess transportation activity will come back to normal by the end of September. Ports again, activity will come back really sharply and if the entities do not have leverage, they should be fine but the real challenge would be for entities which depend on new order inflows, that is capital goods companies. So until and unless they have a very healthy order backlog and thankfully some of the companies like an L&T for example has a former three-year backlog, they are in a better position even if you say a lot of new orders are coming in very quickly.
But as you rightly said infrastructure was anyway a problem even before the Covid situation; now things have worsened dramatically. Nobody will have the ability to invest for sometime and new projects will get pushed back. Existing projects should be okay and unfortunately the government which was one of the biggest spender of infrastructure may not have the capacity to spend over the next one to two years because clearly our fiscal deficit is going to go up sharply even without any major fiscal stimulus given the big decline in tax revenue we will see in the first quarter of this year and also the second quarter.
If the government has to provide any fiscal stimulus, which they should in my view to certain segments of the economy, then the ability to spend on the infrastructure projects is accordingly limited. Next year again, the focus would be on bringing down the fiscal deficit to more sustainable levels in order; so I doubt new investment in infrastructure is taking off anytime soon.
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