The Covid second wave has brought things to a complete standstill in Mumbai with lockdown being imposed in Maharashtra. This is going to have a cascading impact on economic growth. How are you looking at Indian markets?
There is no question that lockdowns are very bad for the economies and not only in India but in the other parts of the world as well. People are beginning to question the rationale of these lockdowns and seeking scientific evidence that social distancing, masks and all the rest are really preventing the spread of the disease. This is one question that is up in the air.
If you look around the world, people are beginning to resist these lockdown measures. In the United States, in some states like Florida they have done away with all of these restrictions and there has not been any significant increase in terms of deaths due to Covid. We have to look at this very carefully. Nevertheless, even with the lockdown, the impact on the stock market will not be significant.
Since March of last year, markets have performed very well despite the fact that there were lockdowns in other parts of the world. So I do not think that is going to have a big impact on the Indian market and, in fact, the Sensex and the other indices are moving sidewards, not down. The market will recover and move up again.
What is your view on overall portfolio allocation? Should equities still form a bulk of the allocation and would you be sticking with some of the tried and tested large caps?
I am not looking at large caps. In India we have medium and small cap companies like APL Apollo and
. These are medium cap companies which are going to do very well in this kind of environment.
Purely on a macro basis, the one thing that one is noticing and there is data to prove is that the mortality rate in the second wave in India is much lower than in last year. In that case, would you say that fears of a prolonged economic impact are justified or would you say that the market is overreacting right now?
I think the market is taking a short-term view based on what they are seeing in the media. This will be temporary and we will see the market recover very quickly.
Could the GDP numbers be scaled down if the second wave is not arrested soon?
I do not think so. The GDP numbers are going to continue to rise as the economy recovers and as India reaches the 5-6-7% growth rate that we saw in past years. We are still in the economic recovery stage and that will continue going forward despite new variations in the Covid situation. People are getting back to work. There will be temporary shutdowns like we are seeing in Maharashtra but this will be temporary. It will not last.
There is a niggling worry that there is no FII support right now. In March and in April till date, FIIs have been net sellers. Is the fact that the rupee as pegged to the dollar is at an eight month low also dampening the sentiment of foreign money pouring into Indian equities?
There is no question about that. The currency situation has a big impact, particularly in the fixed income segment. For the equity segment, most of the equity investors are inured to weak currency and will look at companies where there will be a benefit to a weak currency, in other words companies that are exporting etc. The software giants in India have been doing very well on the back of local weak currency and strong US dollar vis-à-vis the rupee. So I do not think that would necessarily weigh on the equity side of things.
“People are beginning to question the rationale of these lockdowns and seeking scientific evidence that social distancing, masks and all the rest are really preventing the spread of the disease.”
Some people would reduce their holdings but generally speaking, a lot of this is the currency effect. People like us, who are long-term investors, will not make any move. In fact, we might even increase our holdings in the face of a weak currency.
If you believe that India is a buy-on-dips market, is there a level on the Nifty that you are pegged to or is it more an individual stock specific case by case story that you are tracking right now?
It is a very individual stock-by-stock story. We do not buy the market, we buy companies. But even if you are looking at the index, you will see a sideways movement. We have had a big move up and after a big move up, you will see sideways movement. I think it is just a sideways movement, not a down movement and going forward the market will recover and continue its upward rise.
What would you be tempted to buy on further dips, if at all? Would it be the cyclical theme or would it be IT, pharma?
IT and pharma will continue to do well particularly in the software arena. The software companies would continue to do very, very well going forward. India is now embarking on a digitisation path which is going to accelerate as we go forward. So companies that are involved in that or who are taking advantage of the digitisation movement will do the best. That also includes some traditional industries. It does not have to be a software company but it can be any industry which is taking advantage of the internet and digitalisation.
What about the pharmaceutical space? Where within pharma, are you sensing opportunity?
In pharma, I would not focus on vaccines but I would focus on treatments because we are now discovering that there are a number of traditional medicines. I do not mean herbal medicines or anything like that but traditional modern pharmaceuticals which are beginning to work and are beginning to cure Covid patients. And that is an area where we have to look because this is to be a very good long term idea for people looking at the pharmaceutical arena.
Do you believe that there is merit in picking up some of those PSU stocks with the government privatisation drive now gaining momentum?
Yes the privatisation programme is very exciting and could yield some incredible opportunities for equity investors. We have to take this on a case-by-case basis and ensure that any privatisation investment is free to operate as a private entity without too much government interference. Those opportunities can be very exciting, particularly in the medium-sized companies where the government is not interested and does not have any need to impose any rules or regulations the way the companies are operating. We have to look at it very carefully.
What happens to financials? The Covid spike could delay some of the credit cost unwind, but the banks’ outlook or guidance could actually improve going forward. Also in life insurance, protecting pricing, ULIPs are going to matter.
If there is a change in terms of a business viability, then some of these non-bank financial companies (NBFCs) could do well. The risk is very high at this stage because many of them are sitting on incredible amounts of losses and loans that will never be paid. That is why one has to look very carefully at the segment these NBFCs are financing. For example, used vehicles is probably not a good idea unless you really know who you are lending to. But some of the segments may include heavy construction equipment. It all depends on who you are lending to and how business is being carried out. So there is a great opportunity but there are also many traps one has to be very careful about.
What about autos? The monthly data show that passenger vehicles as well as two-wheeler volumes are amiss. Also trucks have managed to overshoot expectations. Do you think that input cost pressures could weigh on margins as well as earnings?
Yes, of course, the input costs are a critical factor. But if you look at the industry specific areas, particularly segments where there is a need to catch up, things like heavy equipment and trucks are going to have increasing demand as we see recovery moving forward. That could be a most interesting space.
What about infrastructure and economic revival themes? Cement for instance has seen encouraging demand recovery even as prices and costs have disappointed. There is also an operating leverage at play but that could get challenged given the statewide lockdowns.
Yes a lockdown and shutdown is a real issue for the infrastructure projects. That would put pressure on cement prices and construction materials in general. But as I said, I do not think this will last. It will be temporary because these states require a better infrastructure. They know they have to move ahead with that and the government programme is focussed on infrastructure to a great extent. I think we are going to see a recovery in all these inputs for infrastructure and India needs this desperately and I believe it will go ahead.
What happens to consumer durables? Do you think that while larger players will continue to drive multiple changes to realign their presence, there could be some consolidation beneficiaries?
The interesting thing about the consumer durables is that during a Covid crisis, people tend to spend more time at home and therefore focus more on these durables in their homes and therefore demand should be building up for such things as we go forward.
I believe that we are going to see some of these companies focusing on that segment which should do very well if they are not already doing well. This by the way is related to interest rates. The Fed rate and the rate prescribed by the Reserve Bank are very low. That means consumer financing could move ahead for these consumer durables.
What happens to consumer staples? The beginning of the first wave saw a huge spike coming into the consumer durable staples segment, especially in packaged foods. Do you think a similar pattern could be witnessed again now?
Yes. The difference here is that for these consumables the consumption has continued throughout this period because of their delivery ability. In other words, companies and retail shops can deliver to homes. I do not think we are going to see a big spike in these consumables even within the lockdowns. These will probably move at more or less the same pace with some exceptions.
But one has to keep an eye on rice prices as a staple. A steady or even downward movement in rice prices could benefit and one could see a spike up in demand for some of these other products.
Would you be betting on economy linked sectors like engineering and capital goods? A cyclical turn is in place over there but the second Covid wave is spreading?
We already have those companies. One of the companies is
, which will continue to do very well. The requirement for infrastructure in India is almost unbelievable. You could fund more and more for infrastructure in India and there is not going to be an end to this demand going forward. I believe that with an economy that is going to be reaching 5 or 6% growth, the expenditure on infrastructure will continue and probably accelerate.