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Should investors bet on the pent-up demand theme in the near term? Nitin Raheja explains

‘The reality will come into play in the next two quarters’

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Last Updated: Jun 01, 2020, 05.52 PM IST
Nitin Raheja-1200
I think pharmaceuticals will continue to outperform in the next few months also.
We are starting to see some sort of rerating and value buying in a lot of financial stocks, says the Co-Founder, AQF Advisors.

Let us get started with financials. We are actually looking at them as beta plays. The entire pack is showing activity building up. What would you attribute this to and where would you look for an opportunity to get in?
There is some sort of a risk on trade that has been talked about with the opening up of the economy. If you look at what has happened in the last couple of months, each of these financial stocks really took a massive beating. They were all down 30% to 55-60% on an average. Now that you are seeing the economy opening up, there is obviously intrinsic value in the sector.

Having said that, clearly the next two quarters or three quarters are not going to be easy for most of these companies due to moratorium issues. You will see a higher credit cost coming there but the fact is there is ample liquidity and there is no squeeze. So none of these companies are going to get into solvency issues. We are starting to see some sort of rerating and value buying for a lot of these finance companies.

Do you think in the interim this pent-up demand theme could be played or has it run out; even when it comes to car batteries, you have Amara Raja Batteries, Exide, Voltas, Whirlpool all running up? What do have within the listed universe?
Clearly, initial signs of few of the consumer companies have shown that there is pent-up demand but please understand that the pent-up demand is an accumulation of the last 45-60 days of demand coming at one shot and starting to look good. The more important thing is sustainability. Even before the Covid event, demand was clearly struggling as far as the Indian economy is concerned. Due to this event, you are coming off such a low base on a sequential basis. It looks very nice but as we start opening up more and more, we will see struggles everywhere.

So right now a lot of the stocks are doing well because they got sold into and corrected into and some of them went down to extreme valuations. You are seeing sympathetic bounce back but the reality will come into play as we go ahead into the quarter. Q1 is not going to be great and Q2 again is not going to be great. So we will see some amount of tempering and consolidation that would happen.

What is your opinion on pharmaceuticals? Do you think these dips should be bought into or do they have already reached their long-term trading averages and can be avoided for now?
I think pharmaceuticals will continue to outperform in the next few months also. However, we would like to actually focus on pharmaceutical companies who have a very very strong API base. This was hitherto a commoditised segment. However, post this major event that has gone through and with all this phenomena of moving production outside to China, companies who have very strong API facilities will benefit very clearly from this trend.

Anybody new coming in is going to take its time; so those companies will do well. I think the pressures in the US market will remain in the short term, which was there even earlier. So I would really look at it stock-specific rather than playing it as a sector as a whole.

What are your thoughts on how autos should be looked at?
Within the auto space, clearly tractors will do well. We just heard the IMD also talk about the high probability of having a normal monsoon. So that space will continue to do well. We are already seeing those numbers in Escorts or Mahindra’s sales. Besides that, we are positive on the-two wheeler space because due to this whole social distancing effect, two-wheelers is a space where people will actually prefer to spend money on rather than going in for passenger vehicles and cars, which are high ticket items. Given that most people are struggling with job losses or salary cuts, that will be a space which will take far longer to recover. So within autos, our preference would be for the tractor manufacturers and the two wheelers.

We are seeing strong moves coming into Exide and Amara Raja. Do you believe these are just near term spurts that one is seeing because post the lockdown, everyone will go and repair or change their car batteries or do you think this is a sustained move that one can see?
Right now I would not like to call the long term from a sustained perspective. I would think this is more of a short-term trend. When markets bounce back, you do see a lot of stocks which got beaten down to close to intrinsic value coming back sharply and that is what you are seeing in the last few days as well. I think the longer term demand is going to be a concern and will take much longer to emerge.

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