“Longer term, pharma is a great story but in the near term, we will have to face some volatility,” says Deepak Shenoy, Founder, Capital Mind.
Why are banks getting slapped and smacked so hard?
The problem really is of two sorts. One is with the Supreme Court order that removes the relaxation for declaring NPAs. Slowly the news has started to trickle in about the nature of NPAs and also the relatively lower credit growth in the quarter. Also if there is another series of lockdowns, that will increase both retail and SME stress. Till now, we have been worried about corporate stress. Now we are going to have to worry about retail and SME where most of these private banks have shifted their focus after moving away from corporate credit.
Also, the banks had stretched themselves a little too much in the past and so we are getting a natural correction. We will have to see if this gets much worse from here but the news on the ground, the coronavirus cases, the potential lockdowns that are coming does not look encouraging at this point.
Is it going to be the same trend as we saw last quarter and even perhaps before that that IT stocks run up ahead of the numbers only to be sold on that day?
It looks like it for sure. From a fundamental perspective, I do not see anything going wrong this quarter. I think hiring and attrition both have been strong and that is good for IT companies because attrition helps them get rid of a little bit of excess flab as well. But business has also been booming. As the western economies seem to recover, we are seeing a lot more orders. In the last two quarters, order sizes have been substantially higher.
The January, February and March quarters will also be quite good in terms of order sizes. I believe the dollar has been against them in some parts. The hedges cover most of the current move but a sharp rise in the dollar or in the rupee can be a numbing factor here. Overall, I expect results to be fairly good. You never know, people run stocks up before results all the time and that could be another short-term issue, but longer term we are very long on IT.
It appears there’s still more rally left in metals. We had the 13th HRC price hike coming in last week and the huge infrastructure stimulus announced by the US government bodes especially well for metals.
I think so. Near term, we are seeing prices rising across the board but the Indian government is going to reduce import duties on coils as well as flats some more in order to cool down prices. When they did it last month, everybody said prices would not come down but they did come down for some time before they were increased again this month. I expect that to happen again.
So there will be some near term pressure on pricing but by April to mid May, a lot of the supply chain issues around steel will ease up. We are going to see a lot more supply in place worldwide. This may result in lowering of prices after May and towards April itself, we will start seeing price cuts internationally. So one has to be a little careful. Commodities run through a cycle and we are probably closer to the end of that cycle now in terms of stock prices. The underlying fundamentals for steel may continue but stock prices tend to be ahead of the steel cycle. We may be closing in towards the end, So a note of warning: it’s a great momentum story but not that great medium term from here going by the past.
What is the outlook on the entire pharma basket?
Pharma right now is a valuation plus good growth story. That may be an oxymoron because everything that is growing has been extraordinarily valued. But you would want to keep that as a bet because going forward, India is going to be a fairly useful international source for a lot of medicines, a lot of APIs and other parts of the value chain.
The problem here is which company to bet on. I would take a portfolio approach here and either buy a pharma basket including large to midcaps who are playing the space or if you are more knowledgeable in that space, then you could work on specific areas such as APIs or contract research and manufacturing and so on. The point is I would prefer a portfolio approach. Longer term, there is a great story but in the near term, we will have to face some volatility because some stocks have gotten extremely overpriced.
We are also seeing some amount of nervousness with regards to the upcoming monetary policy later this week. Your view.
There are two layers to this. One, the mandate of the monetary policy committee (MPC) is only inflation, there is nothing else. But at the same time, they have talked about how they need to keep growth in place while talking about policy. As for rising bond yields, the RBI governor himself has said that the government is coming up with a tremendous amount of new issuances. If you are worried about that, then the RBI itself is going to be a pretty big purchaser probably of the order of thee lakh crores out of the nine lakh crores issuances.
So in all probability, the net issuance being only six lakh crore will not be such a big deal as to not be able to be absorbed by the overall market. The problem is whether inflation continues to go up. In the near term, it may look a little ugly especially for March. We are talking 5-5.5%, but by the end of this year, it should go back to below 4%. We are looking at bond yields and I do not think a big spike is on the way either in India or abroad. I do not think MPC is going to come up with a rate hike this month. At best, they might focus on when the interest rate cycle might change.
What has been your takeaway from the auto sales numbers? Is the best behind us?
It is a possibility. I mean the next two months are going to be fantastic because last year April and May were washouts and so we would not actually make out too much. Plus we are getting some more lockdowns and possibly people being able to step out to even buy a car will be difficult in the next two or three weeks. But I am not unduly worried at this point. At this point, once we get over this hump, a lot more in terms of personal mobility will be required.
People who are reasonably well off and who have been stranded in the lockdown, will probably go in and I feel two-wheelers will probably lead the way. But we also have a lot more car demand ahead of us. I am long on a lot of these names and I am going to be biased on this front but I do not think that penetration in India is so much that we could say that we are saturated. Although economically, life has been hurting a lot of entry level people at this point, within the next six months, the situation will ease itself out. If interest rates are where they are or lower, we will see a much better picture for car sales and two-wheeler sales going forward. Commercial vehicles have different paths altogether, I am not seeing much positivity there yet.