Look for new leaders in these 2 sectors as growth emerges: S Krishna Kumar, Sundaram AMC
I would place our bets on a slow improvement over the next six months
- Markets have turned, we are getting into a broad-based rally: Dipan Mehta
- Money will be made in these 5 bank stocks in next 1 year: Sanjiv Bhasin, IIFL Securities
- It will take another 3-6 months for private capex to kick in: Andrew Holland, Avendus Capital
- Unlike FY2009, we don't have fiscal and monetary ammunition to revive the economy quickly: Sanjeev Prasad
Do you feel the bulls are firmly back in charge and that we are going to proceed with strength from here on?
There were two-three phases to this. One, we were all waiting to see what the government and RBI can do to restore growth. Second, the market started moving up a little bit on that hope and the second part of the hope trade came when the government and RBI acted on this through certain measures like rate cuts, corporate tax cut etc. The third leg of this trade would see growth coming back. The October-November quarter is very important for a lot of the stocks to get cleaned out. Initial reports suggested that things have improved, although it always could be much better. We do believe that the worst is probably behind us and we would start to get back to normal growth over the next six months, which has been our base case.
The markets tend to place the bets a little ahead of the recovery. In a lot of beaten down sectors, the more cyclical domestic-oriented stocks have seen some interest coming back. A lot of shorts have been covered and some new buying has also come in. All this would lead to a broader recovery across the markets. But the pace of recovery would be again very much data dependent from here. I would place our bets on a slow improvement over the next six months from the markets perspective. The worst should be behind us definitely.
I completely buy that the worst is behind us. From the day the corporate tax cut was announced, benchmark indices are up almost 10%. The good quality mid and smallcap stocks are up anywhere between 5% and 25%. Are the markets pricing in early signs of a weak recovery?
The answer is yes and no. As you said, lots of stocks have held pretty nicely over a period of time and good quality names have also rebounded. So, when you look at overall market indices, you might not see that much of a significant appreciation. But if you look at the stocks from a bottom-up perspective, you would see a lot of rotation happening across sectors and stocks where an active fund manager would be able to make the returns in the broader market.
If you think we would get 10% in the next 9 to 12 months in the broader market, by building a more diversified portfolio with better stock selection, you could beat that by another couple of bps at least.
Definitely a lot of new winners would come through. Something which has performed very well would start to moderate in terms as money rotates across ideas.
Talking about rotation, what is the next big trend?
If you look at the domestic cyclical part of the economy, the consumer cyclical, look at auto as well as the apparel business. A lot of them have been under tremendous stress in terms of growth. We believe that with the panic of a sharp 50% drop in volumes etc. going away from autos and some of the apparel companies, a lot of these companies would bounce back pretty nicely.
Auto components have been battered out of shape because of the weakness in commercial vehicles and cars and they are available at very attractive values. Autos as well as auto components are great spaces where valuations have really taken a bit of a knock. If you look at earnings PE, you would definitely find that super expensive but at the bottom of a cycle, you do not look at PE multiples. You should look at it more from the angle of enterprise value that they can generate.
Cement is a sector that you remain fairly bullish on. How are you looking at the fundamentals within the cement space?
From a medium to long term perspective, capacity evaluation is going to be tougher given the availability of limestone reserves in the country. The other part is again building on distribution. A lot of these things are going to be difficult. The top five-six companies would continue to consolidate market share over a period of time and call the prices basically. We believe a lot of price discipline will naturally slip into the industry, more as a rule than as an exception.
Second, costs have been pretty much under control and dropping. We see margin expansion from there.
Third, demand is the key. Housing is pretty much okay in the mid market but government spend has been a little low. We do expect this to pick up in the next six months with government spending opening up and liquidity getting better. We should see an improved demand outlook for cement from here on. The fourth quarter would be far better from the demand perspective.
In the medium term, it is a great industry. It is a domestic play though commodities is influenced by global forces, The top four-five players will consolidate further as we go forward.
Post corporate tax cut, the view on the Street is that the disinvestment will be a smooth process. On government action side, could there be room for greater disappointment not because of the intention but purely because of the pace and process?
A couple of things. If you look at taxation on the stocks, capital gains etc, what people are expecting is actually a reset of what they did in the past. It is not that anybody is seeking a benefit, rather people want normalisation. The prime minister at the highest forums -- in the US -- has promised that he will bring in more tax reforms in the country. So, the timing is not sure but at some point, it will happen.
Second, if you were to believe that some reforms on capital gains taxes, etc, happens, there is not much of capital gains taxes that the government will lose at this point in time. If they cut the rate or the duration, it is more a feel-good in the near-term than anything else.
From divestment perspective, clearly that is one big lever that can help India delink from the rest of the world, rest of EMs where there could be pain. Divestment is a very significant reform and foreigners and investors love it. So that is clearly the message.
The government is very focussed on getting foreign capital into the country which is very important from the long-term growth perspective as we are definitely a capital starved nation. The government would try its best to do a few big deals, so that the path is set. It is not that they would want to sell 25 units at one go or in six months. That is not possible. Definitely, they will attempt to do two or three big ticket disinvestments, which will help the fiscal also and provide the necessary direction in thought process on what the world can expect from India.
The government is focussed on it at this point. Disinvestment of Air India, BPCL and probably one or two more -- Hindustan Zinc and few others which are hanging in there for some time, could be done in 6-9 months.