There was a gap down start but on Tuesday we have recovered much more than what we lost on Monday. Is this an epic bull market?
We have been in a bull market for a while and I do not think that the market mood has changed substantially, although, of course, there are lots of reasons to be cautious. I would imagine that one of the indicators would be people throwing caution to the wind and I don’t think we have reached that status yet.
On all parameters, whether you look at valuations, whether you look at the fact that relative to the rest of the emerging markets, the performance of the Indian market has been exceptional – we are trading at the higher end of the range both in terms of historical as well as relative performance.
Cement is not a global commodity. We can say that India is going to grow and so cement becomes a no brainer. But the Adanis and Birlas are going to be fighting. Will that be good for shareholders?
The question is what kind of aggression you expect Adanis to bring in given the fact that we are buying at prices which are reasonably aggressive. If they have to generate any kind of return on their equity, they have to go out and try and gain market share which means that one should expect some level of aggression from them in the market which will also mean that the current settled kind of market share equations that had happened among the top three players in most of the segments, will probably get shaken unless people are willing to accommodate the requirement for Adani to grow more aggressively.
Net-net, I would imagine that for the near term at least it may have some kind of pressure on the volume growth that we will see among some of the other companies. That cannot be good news in a scenario where the margins are already somewhat squeezed.
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Going forward, it is possible that the margin squeeze may come off but one of the other constraining factors is also the fact that the kind of supply increase that has been happening in the industry has been fairly aggressive and that means that demand-supply mismatch continues to remain in favor of consumers. The supply is a lot more than what allows most of the companies to operate profitably.
So that is one catch and that is the reason why if one has to be in a sector, one needs to remain among the largest of the lot and rather than try and cherry pick at the bottom which are cheaper but front line companies do not offer valuation comfort and the smaller companies unless they are working in very micro markets and have supplemented capacity and therefore are takeover candidates, do not offer any significant upside. It is a tough market to play right now for cement.
Is it the right time to look at power sector stocks?
If you buy the right kind of stocks in the power sector, there is enough money to be made. .What is happening is if you look at the renewable capacity that India has set up, depending on whether you take hydro in or out, between 120 and 160 gigawatts of renewable on a total base of 400 gigawatts of installed capacity which means for variable renewables like wind and solar the grid cannot take too much more and which is why we have seen a slowdown in activity in the PPAs that are being signed.
Therefore companies like
and to some extent are both benefiting because NHPC is going to double its capacity over the next five to seven years and perhaps be more aggressive depending on some of the approvals that the government is likely to give them.
NTPC has already got a very large set of orders from the government and are therefore back in growth mode. These remain dividend stocks. We are getting 5% plus in both of them besides the fact that you will have growth and you will automatically get at least a reasonable double digit return from this. Remember that these are utilities and you cannot expect them to behave like FMCG or growth companies. But that said, a steady kind of early teenage growth should be entirely possible for utilities for the next few years.
What is your pecking order in the entire financial space? Are you looking at small banks as well or would you want to stick with the ICICI Banks and Axis Banks of the world?
The larger banks will be big beneficiaries of the uptake that we have been seeing and predicting for several months in terms of credit growth. But that said, at least the smaller corporate facing banks are also likely to do quite well in the near term for the simple reason that credit growth has started to pick up and importantly the balance sheets are clean.
So if you are going to make NPAs, that is going to happen over a three year period. For now, the valuations of some of the smaller banks are not very expensive. However, what I would be wary of is the consumer facing banks because that is already reasonably highly priced. Most of the NBFCs and consumer lending banks are not very cheap. Also, if we believe that there is some kind of pressure at the lower end in terms of the market, that is where it will show up the most. I would think corporate facing banks large or small are the preferred bets.
IT clearly has seen a massive decline aligning itself with what is happening globally within the IT space. There are a lot of concerns around the delay in variable payments as well. If the stocks were to correct further, would you be a buyer just yet or would you think that the globally linked sectors will get a little problematic also because they have run up too much?
It depends on what you are comparing with. If you look at some of the other sectors, none of them are trading very cheap either. Clearly the problem with IT is that the growth rates can be measured and they are somewhat muted after a reasonable run. I would imagine that you will still get a decent amount of growth in most of the companies.
The problem now seems to be more Europe than anywhere else. Some of the companies which are exposed to Europe will likely have problems as we go into the next few months because various European economies are showing serious stress including Germany.
But for the US, we are yet to see pressure of the kind that will actually impact their earnings in a very meaningful manner. They are trading at the upper end of the valuation. If they do come off, it is still something that you would want to remain at least market weight or marginally underweight in, but not significantly.
What is the story in TTML? A Rs 5-10 stock became Rs 300, came down to Rs 90 and it is locked up. I am literally scratching my head, please help me out?
I have a very limited set of stocks which I worry about. Those that do not meet my criteria, I do not look at them.