What is the outlook on some of these chemical stocks because the consensus is that the India business will outshine the global earnings when it comes to the metals basket and we could see improved financials going forward? What is the sense that you are getting?
Chemicals is a completely different story and I have been bullish on chemicals, speciality chemicals and even agrochemicals. The issue in chemicals is it started around the time US-China trade was at its peak. The global procurers of speciality chemicals started looking at alternate sourcing locations and India was absolutely correctly positioned. We have a bunch of speciality chemical companies which are efficient and producing state of the art chemicals.
Now with the coronavirus and what is happening all around us, it is absolutely clear to all global large manufacturers who need chemicals that they have to diversify the procurement away from China to whatever extent possible and Indian companies are very well positioned.
So I have been mentioning this for some time; let us say, Aarti Industries, Himadri Chemicals, Nocil, Deepak Nitrite, all of them have reasonably strong balance sheets. They have an excellent product profile which is already accepted by the global manufacturers. They have already started getting significant incremental orders and I think this is going to sustain. As and when the coronavirus subsides, this trend is going to only strengthen and they will have good times; so investors definitely can look at nibbling into this sector.
What about the currency? We are seeing quite a bit of a movement for the rupee to the US dollar. In fact, it is quoting around that level of 76 against the greenback. This, of course, is going to bode well for the likes of IT companies in particular. What are you seeing when it comes to the overall correlation between IT and the currency in these tough times?
I think they are absolutely right. Yes, currency depreciation definitely adds to their revenue without them doing much and depending on how much global exposure they have, they all will benefit because of the currency depreciation. But the problem is much bigger. The entire global economy has been disrupted; so it will take quite some time for them to come back and Indian IT companies along with all other service providers will definitely take a hit on account of that.
There are multiple estimates but even today, if you look at the entire IT industry as a whole, the pure technology services would be operating at between 80% and 90% capacity. The BPO industry, wherever it is relevant, would be operating around 50% capacity. The Cloud services and other support services might be operating at around 40-50% capacities. So definitely, there is a cause for concern along with almost all other businesses; so there will be an impact on revenue. Yes, rupee depreciation will compensate to an extent.
What do you make perhaps of some of the commentary coming in from the auto majors? We had a very strong commentary coming in from Bajaj saying that we are going to have to really start selling assets to survive this. Of course, at the moment they have not done anything and are ensuring payments to staff. The industry is obviously struggling. We had Hero, of course, invoke force majeure. What is going to happen given that this is bound to also have an impact on demand even post the lockdown?
You are absolutely right. Some of the commentaries which we are hearing are really scary but one has to understand that for the auto industry, this is a perfect storm. They already had a significant challenge in terms of slowing down demand and we have been seeing this getting played out over the last year.
On top of that, they had this BS-VI transition, which obviously entails significant additional costs and any kind of changeover leads to a lot of inventory surplus and management and operational exercise and time. And we have this entire country in lockdown and the demand going for a complete toss.
So it is absolutely a perfect scenario, which we call a perfect storm and they have a huge challenge going ahead. Yes, what Hero has done like stopping the payments to the suppliers and things like that is little alarming and will have ripple effect on multiple other sectors and companies but the reality is, if you do not have demand, if you do not have takers for the end product, anyway the supply chain or the entire value chain will suffer. So that is what is going to play out for some time.
There is a lot of noise being made about industry-wise stimulus. It is a little too early but we hope that the government is working on that. I am not saying that the auto industry should get something or not but the fact is a whole lot of industry and whole lot of sectors which employ significant amount of weaker sections of the society or engage with significant amount of weaker sections of the society will need some form of relief and support in the interim till things become normal.
What about the FMCG majors that have been outperforming, particularly the likes of an HUL? What would you make of it based on current valuations and entry points? Would you consider looking at these names as an opportunity?
Yes, I will look at it as an opportunity. There are few things you have to keep in mind. One is, leave corona for a minute and leave the period from 15 March onwards for a minute. Even before that, very clearly with bumper crop we were looking at the green shoots as far as rural economy is concerned and FMCG companies having good distribution in rural India were expected to do well in the coming quarters. So HUL definitely qualifies in that bracket; so does Dabur, Marico and many other companies.
Due to the outbreak of corona, pretty much every other business has been disrupted. I am not saying these companies have not been disrupted but this disruption also has shown some opportunities for these companies and their products are still being sold and will continue to get sold in the foreseeable future in spite of the lockdown. So there is an opportunity here and as and when people get some income, and I am talking about the lower strata of the society; their consumption will completely be focused on FMCG which companies like HUL, Daburs of the world. So I am bullish.
Also remember as and when things settle down, foreign funds will start buying into India and for them, this will be a pocket where they will clearly see growth and they will focus on this sector. So yes, you should look at HUL, Dabur and Maricos of the world and think of buying to build your portfolio.
What is your perspective on healthcare? We have been discussing them in detail but where do you see them going from here? Which ones are looking attractive? Would it be in the midcap space or the front-liners? What is looking good at these levels?
I would be looking at sectors and healthcare definitely is one sector along with the hospitals and other healthcare-related stocks. So yes, as far as pharma is concerned, we like Sun Pharma. Apart from everything else, we strongly believe that in domestic pharma, there is fantastic growth happening and this I am talking about pre-Covid. Of course, Covid-19 offers significant incremental opportunities for pharma but otherwise also Sun and some other pharma companies who have a strong domestic business are in for good times.
There is volatility related to the US business and multiple regulatory, quasi regulatory action in the US. But for a minute, if you assume that we have seen the worst in the US, companies like Sun Pharma or Cipla definitely deserve attention. I would also put Dr Reddy’s to that list; all these can be looked at.
On the healthcare side, again all the three diagnostic companies which are listed can be looked at. Going forward, the way the world will work, the way the world will have fun and everything else, they will be a part of the lifestyle even more than what they were. So a Thyrocare, Dr Lal Path as well as Metropolis can be looked at. But remember, these are long term buys I am talking about because they have already moved up quite a bit. Apollo Hospital also can be looked at.
Along with that, I would like to add one more small angle. We should look at the insurance companies as well, both life as well as general, which are performing and have a good balance sheet. Of course, the listed sphere or listed universe is pretty small; so one can look at SBI Life, HDFC Life and also ICICI Lombard. The opportunity and scope for their insuring lives and insuring health will significantly increase and if you are a long-term investor, you should definitely look at these companies.
