Not election, focus on earning recovery cycle: Taher Badshah, Invesco
The result season tends to indicate that the expected earning recovery is on the way, says Badshah.
Why was everyone caught with a bearish view when the markets surprised us in last 15-20 days?
We have been holding a slightly different view for some time and we have been relatively constructive on the market. We have been advocating that these are conditions which are very similar to developments in 2014. There was anxiety, confusion. There was mid and smallcap correction and conditions were exactly the same. What has probably changed is probably that the market has not focussed as much on the earnings recovery cycle. That is something which we need to focus a lot more on rather than the ballot.
And that is where the anomaly probably lay. Conditions for recovery in earnings continue to remain strong. We have not seen earnings intensity or magnitude of a nature that one would desire but incrementally things are looking up and the result season tends to indicate that the expected earning recovery is on the way.
The market has overlooked that for a while and was caught up in geopolitical issues. Reality has now returned and that has led to the sharp move in the market in the recent past.
Where do we go from here? Should one not get carried away because the terrain is suddenly looking green?
I would like to think that we still have legs in the market. We are seeing a very sharp move in a very short period of time and that tends to be unnerving for many market participants but this is generally how the markets moves when it comes out of a groove after a very long period of time.
But if one focuses on where we are in the earnings recovery cycle, then we will come up with better conclusions about the market and that is what you need to be focussed on.
We are relatively more convinced about that unfolding over the next couple of years. Macro conditions are falling into place. We need to clear one or two events. Many of the other events are behind us. Liquidity situation in the market is looking reasonably okay. The market has borne a lot. Many of the negative developments in the last six months have been absorbed by this market. So to that extent, any of the positive news would get very quickly priced in.
What is your view on oil and gas pack?
We are incrementally constructive on oil marketing companies (OMCs), especially from a contra standpoint. Quite a lot of the negatives appeared to be priced in. It does not appear that oil is going to move beyond $60-75 price band for some time. OMCs are reasonably priced or are cheap enough now compared to a year back. The steady price increases that they have taken, is giving them enough cushion even if oil were to spike up by another $10 or $15 odd. So, there is merit in some of these OMCs. We have larger exposures in some of the other oil and gas companies including the heavyweights and also some of the gas pipeline and utility companies where we find value.
We like different businesses for their own reasons. Aggregate it adds up to probably being an overweight situation on the sector but this is more a culmination of the bottom-ups.
hat is the future projection for L&T in terms of targets?
It is a little hard to comment on individual stocks but this is one of the stocks that we have in our portfolio. For us, it is a play on industrials and the infrastructure space and that is where we are positioned from that perspective. We are attracted to its balance sheet improvement over a period of time along with now conditions developing in industrial/infra space. Valuations are also reasonable, though not cheap.
You are bullish on corporate banks but I do not think any corporate will start committing to capital for next three, six, seven months. What is your view?
Yes, I would not expect many of these corporate banks to start lending to the infrastructure space in a big way. We do not really think they are configuring themselves for the next three to five years from that perspective but by and large, the credit cycle is improving and these corporate banks are getting a lot more consumer-oriented and working-capital-lending oriented. So, we might want to tag them as corporate banks but in next few years, they may not look like corporate banks have been traditionally.
For us, they have been more value-related ideas which we have been holding for close to about two years now. We have seen the ups and downs but there is still value and some are still available at a cheap price.
We are seeing the credit cycle improving, not as much from the project loans point of view. We are buying them for that reason not for the fact that they are going to be participants of a wider infrastructure/corporate investment cycle.
A lot of PSU names like Coal India or NTPC are starting to look fairly attractive now. Is this the right time to get into some of those counters?
I would think so. From a value perspective, we have come across a couple of names which do provide that opportunity. Some of them are very cheap and some of these are cyclical in nature or are commodity businesses. But even if we budget for a weaker commodities cycle, when we look at them from the point of view of where they are on the cost curve, we find the market is probably pricing in the worst or not such a great scenario from a commodity price cycle standpoint.
Valuations are also turning not only comfortable but also cheap and to that extent, we have reflected some of these names in our portfolios as well. Clearly opportunities are emerging in this area but from a value perspective, not as much from a growth perspective.
What is you view on real estate sector?
We honestly have not really developed any great view around this sector. We also don’t own any names in this space at this stage. They still do not fit some of the requirements of our investment framework and we have found it difficult to come up with bottom-up ideas.
This is a sector where you need to be a lot more stock-focussed. I do not expect a sector-wide rally, if at all, in this space. One has to be very choosy and we have not really yet come across any ideas in this area. I am not suggesting that this will not do well but it is something that does not appeal to us.