Prices have come back, but the economy is not yet back. Are markets running ahead of themselves?
What we are witnessing is the phenomena of what is classically termed as the worst is over as far as the markets are concerned. That means, even if the economy is painting a little bleak picture or even if some of the corporate earnings are missing their estimates (volume numbers of automobiles are still de-growing and cement is still not so good), the markets are saying that a suitable base has been formed in terms of earnings and in terms of profitability. The market starts moving up, saying the worst is over. That is what we are classically witnessing right now. We are reaching back to the all- time highs. In fact, Sensex has already crossed the all-time high of the recent months. We believe that the worst is over for most of the companies. There will be good growth ahead for a lot of them.
Have you had a chance to look at Cipla earnings? The stock has cooled off but it was a decent set of numbers. We have been looking at a whole host of pharma names on the back of earnings today.
I would not look at the Cipla numbers but some of the pharma companies have reported strong numbers and this is coming on the back of the fact that we have the corporate rate reduction flowing in at the net profit level, not necessarily the PBT level. But for many of the pharma companies, the domestic environment has been relatively stronger and somewhere the US market is depending on which therapeuticals side you are in. It is a mixed bag. Some are doing well, some are not, but the common theme is that most of the pharma companies have enjoyed the tax benefit in full and that is visible in the way, some of the stocks have moved up.
Eicher is up 30%, Maruti is up 35%, State Bank of India has moved from Rs 255 to Rs 310, ICICI Bank is sitting at an all time high. If a client now asks you whether you should chase the momentum now or wait for a meaningful 10-15% decline, what will you advise?
No, I do not think we can look at a meaningful decline of 10-15%. Those days are now gone for the market in the near term. If at all, you have to play the momentum game. You cannot miss out the market by sitting on cash. The momentum is coming because the worst is getting over for many of the companies and especially the good quality companies. If a Maruti for example is showing a 25% volume decline in the first half of the month and is guiding for the year to be at a negative growth rate, it tells you that this year is gone is factored in. But the next year is going to be even better and many of these companies have a built-in hope because from an operational standpoint, they have not missed margins. Their margins are not low.
In fact, if at all, they are guiding for better margins ahead. Financial services companies are guiding for lower slippages, lower NPAs and so on. The guidance that is coming out from some of the large companies is very strong and one has to reiterate that it is a worst is over kind of a market.
What was your takeaway from the Infy conference call?
It was very clear that there is no proof behind the allegations that have come from the whistleblower. That was one event which caused the stock to tank and people had the previous episode in mind when the stock tanked when you had similar allegations coming out at the time of the Panaya buy.
Then, at least a certain proof was submitted, there was a whole lot of investigation and after the churn that Infosys saw in terms of corporate governance, a lot of senior management was changed. Nandan Nilekani came back again.
The track record of Infosys since those days has been pretty strong, both from its business point of view and even from a corporate governance standpoint I would say because this whistleblower complaint was really speaking of a meaningless kind of complaint backed by no proof.
The entire loss that Infosys suffered in terms of the stock price fall will be recovered. That recovery has not happened still, even at the current price of Rs 710 or 712. We expect Infosys to recover quite strongly.
What is one of your high-risk-high-return ideas where there could be a 10% downside or maybe a 15% volatility, but your analysis is indicating that 30-40% even 50% gains are coming in the next 12 to 18 months?
There is clearly one sector where we see something which you did mention is likely to happen and it is in the auto ancillary space. A lot of auto ancillary names have fallen quite sharply. The distinction we are making is that some of the auto ancillaries are global in nature and some domestic. One should look at only those which are domestic kind of auto ancillary companies that have sharply fallen down.
With a large volatility and perhaps a small downside, they have the promise of delivering very good returns as we move forward. If we take a one-year or a two- year view. Many of these auto ancillaries are suppliers to the large OEMs including Maruti. You can pick names within that. We already have coverage on a small auto ancillaries like PPAP Industries which can likely do well. So this is one space.
We have some other stocks where one can potentially get great numbers and this is the housing space. More houses built means more cement, more cement possibly means that you will require more coal. Right now, they are dependent on domestic coal but you will have Coal India upping its production after a phase of de-growth. When coal production goes up, there is the requirement of a certain kind of explosives. We recently met a company called Solar Industries which make explosives used by the mining companies.
So, these are companies which will have solid volume growth. We are looking at companies which can have solid volume growth delivery in the next one or two years, because of a low base effect. With operating leverage coming in and margins improving, probably these companies can deliver great returns in the years ahead.