Let us understand how you are looking at the entire market set up over the last 15 to 20 days. We have seen quite a bit of up move in the Indian markets. Do you think the worst is factored including the slurry of downgrades that we were seeing are all factored in now?
From the downgrade perspective, we are left with maybe a quarter or more because I think still maybe next quarter there could be some level of downgrade coming in the market, but that should be small. It cannot be as high as it was in Q1 but because broadly the negative news flow was mainly around inflation, geopolitics and interest rates.
In the case of geopolitics, it should be better if there is no new flare up coming up from China and if there is no new flare up. Most people now don’t talk about the Ukraine-Russia war a lot. It will have some impact on the European economy. If it does not get resolved faster, Europe will have some impact but the market has already factored that in.
Interest rates are going up and our 10-year bonds have seen some cooling off. That may be short term but at least maybe the yields are not going up sharply now and even the inflation trajectory expectation is down. The data is telling us that the negative news flow is broadly there, I do not think there is anything new unless and until we see some new Black Swan event coming off from somewhere.
How are you looking at the entire automobile space today? is coming under pressure on account of the high level exits. Overall, when you compare the two-wheeler and the four-wheeler space, which side are you tilting towards? Is the demand momentum likely to offset any supply side pressures?
The auto space had a demand problem for some time now because a lot of it is specifically the EV side of the business. A lot of it was mainly on the supply side. The supply side issues are slowly getting resolved. Demand still remains strong and so I am not worried about the auto sector from a demand or supply angle now.
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At the same time, I would watch out for the two-wheeler space because the rural economy is still not in a great shape and two-wheeler is broadly a rural play. However, incrementally EVs are going to remain a theme. We sometimes forget about it, sometimes talk a lot about it but it is going to be a theme for a long period of time, at least for the two-wheeler space
Two-wheeler sector is not somewhere I would not be very bullish on. I am much more bullish on the PV side of the business and even CV incrementally seems like a good space. I am bullish on auto per se but yes PV and CV are the areas I would like to be in.
What is your view regarding the entire banking pack? Of late, big momentum is building up for the smallcap banking names like , Central Bank and even other housing finance companies. The likes of L&T Financial Holdings have been doing quite well. Is there a specific pocket in the BFSI space you are watching out at the moment?
In my view, for the larger banks, broadly the market knows that the environment is great and they have already priced in the valuation because the larger banks have significantly outperformed the smaller and the mid sized banks over the last couple of years. The carnage has been on the small and mid-sized banks’ side. Incrementally, the credit costs are going to fall because the system has gone through a cleaning up through multiple years of NPLs and downgrades and Covid has helped the cleanup to a vast extent.
Now banks have no capital problem. If capital raising is happening, then mid-sized and small sized banks are the areas where I would be more excited today. The largecaps will have a great time but the valuations have caught up there.
What about the IT pack that has been coming under tremendous pressure? This year, we have seen Nifty IT being down about 20-25%. One part of the Street believes that we are at the start of the downtrend and the other part believes that the long-term story of IT has been generating a lot of wealth in India and is likely to continue in the long term. What is your take?
IT is a very long term story. I have no problem in saying that IT is a 5-10 year story. There is nothing on there. The problem which happened was because of valuations where they traded just around the year back. If I leave the madness of 1998 to 2000 or somewhere around, most of the companies, specifically the midcaps, were trading at valuations where they have not traded and that was mainly coming from the fact that yes there was a demand momentum and the growth rates from around 10% was going to around 14-15%.
What has been questioned is whether this 14-15% growth can happen with the margins which were there earlier. The answer came out that it was not happening because there were a lot of supply side pressure from the other side. Now the valuations have come down. Market expectations sometimes are built on valuations because we need to justify the valuations and build up expectations. Now the valuations have come down which means the expectations are coming off. Maybe for one or two quarters, we might see it underperforming but from a longer duration of three-four years, I am not worried at all about IT now.
How much of the momentum of the market going forward would be decided by internal and domestic factors and how much would depend on these big events like the Jackson Hole Symposium. Do you expect FII flows that have returned to sustain?
The area which is exposed to the global news flows because most of our market is domestic, is just that there is a certain segment of the market which is global and and IT is the largest segment of that market and that is causing some panic because the global news flow has not been great and Europe specifically is in trouble and because of multiple reasons we know about.
Even in the US,it will be more of a technical recession rather than a long term recession. But the recovery in the US can be very fast. That is where in the near term, this news flow around Europe and the US will keep playing around. But a large portion of our market is actually domestic facing and that is doing really really well. So I am not worried about the US, I am not worried that much about the European parts. Not too many of our companies are exposed too much to Europe.
What are you worried about if you are not worried about what is happening in the US? What are the key risks that you are watching out for in the market?
The problem is that the last three years, we have had risks which we did not even think would come about like the Covid pandemic and the Russia-Ukraine war.
What worries me is where we are sitting on the valuation side. If we are sitting at a very high valuation, any risk playing out will lead to deep cuts. I think on that front when we are seeing some bit of sort of reasonableness coming in multiple sectors. So I am much more sector specific now. There is reasonableness coming in on multiple sectors from that particular point of view.
So valuation remains your key concern and you are talking about sectors and pockets where valuations have become reasonable. Which are those pockets? Do you have any stock specific recommendations and ideas in terms of how the sectors are likely to move?
No stock-specific recommendations, but financials is definitely an area and mid and smallcap financials are still an area where the valuations are quite reasonable. We are going to see a good two or three years from our top down point of view in that particular space. That is one area I am very very bullish on.
Also, I am getting incrementally bullish on IT. I believe it is a long term story. The digitisation story is going to play out and so that is another area I am positive about.
The capital goods is the third area I am still positive on.
So since you talked about capital goods, are you looking at the defence space? Are there signs of a definite recovery when it comes to the capex cycle in India?
One of the things I always watch out for is what is the government philosophy around capex. I think it has just been the last two years where the government is so much focussed on capex. Capital formation cycles have to start from the government and then only private capex space so that is one area.
What I would really like to avoid in this entire space are the ones which are very cyclical. Would I invest in defence? I would say no I would not do that. Maybe for a lot of people it will be a great area to be in but I would not be there. I would rather be in the power segments or road segments, areas which are much more normal rather than the new themes.