On expectations of car sales figures
The two-wheeler space is under a lot of stress and the stress will continue as prices have gone up. There are concerns related to rising fuel prices and the two-wheeler segment is very sensitive to that. Revenues are generally stagnant, except for a few categories, such as IT, which have seen pay rises. Four-wheeler demand isn’t much affected, but still, sentiments will develop. Demand for commercial vehicles (CVs) could slowly increase as unlocking unfolds over the next year. That category has relative strength.
On the increase in the price of domestic oil and the actions of ONGC
ONGC is a big beneficiary and to that extent there could be some impact on the stock price movement, but largely ONGC is an underperformer in the sense that their production numbers are stagnant and even declining. If we have to think that higher prices are going to be sustained in the long term, then one can buy it, but if the view is that in a few months we could see prices go down again, then obviously it is more of a cyclical action. In that case, it is more for short-term investors or traders; Longer-term investors don’t have much to look for when it comes to ONGC.
About Tata Communications
In my opinion, Tata Communication’s movements tend to be quite random. Volatility is very high, driven by relative illiquidity. Personally, I don’t see much of a story on Tata Communication at current prices, so I’d largely stay away.
Samir Arora says many consumer stocks will drop 30-35% from the top. your sight?
They are already down, many of these stocks are down 30% from the top. Look HUL, look Britannia. Except for some paint companies and companies like Pidilite that might be down 10-15% or some companies that stand out, many are already down 30-355%. Are there more possible downsides there? The short-term demand outlook has been very dovish according to most consumer companies.
Therefore, the valuations do not fully reflect what earnings downgrades might be. I think this is a time to stay away from these companies, especially if they are taking a volume hit. Then they are having an impact on the margin because the entry price has gone up a lot and when volumes are suffering, they can’t push prices up either, which will have a bigger impact on demand.
It’s a double whammy for these companies and this is the time to stay out of it. Over the next six months, some of these companies will present opportunities because they are long-term growth companies and such cyclical downside opportunities give us an opportunity to buy them. For people like me who have been waiting a long time because they were so expensive, the next three to six months will offer the opportunity to buy some of these.
About multiplex stocks and PVR-Inox plans
Structural actors have become stronger. Reopening businesses are getting stronger as most state governments start to lift all restrictions like Maharashtra. The structural story is related to consolidation, people getting away with spending more on small pleasures in times of high inflation is a good story for the next two years.
It’s a very unique positioning and I don’t believe in that argument that because of OTT people are not going to leave their homes. Many people make those arguments, but just because you can watch some series or movies at home, one will always sit at home and not move. that story will not work in India or anywhere in the world.
These stocks are not very well owned by institutions like national funds. In mid-cap portfolios, hardly anyone has them, and even if they do, it’s a very small proportion. As performance improves, the property will improve over the next one to two years. These stocks are buys at current levels as well as corrections.
On the CLSA report on how the valuation gap between ICICI Bank and HDFC Bank is entering a fair zone now
The valuation gap has narrowed significantly and all of these banks are now very similarly positioned. The net NPAs of most big banks are very similar, so it all comes down to capital adequacy, credit growth, and how the balance sheet is managed going forward. I think that will be the critical factor. The only negative for the banking sector at the moment is that credit growth has refused to pick up and so from 7.5% it’s up to around 8.5% and most people are calculating 12-15% credit growth next year while factoring in estimates for most of the larger banks.
If credit growth remains subdued overall, there is a chance for some earnings downgrades next year. That is the only risk for many of these larger banks. Otherwise. fundamentally they are quite well placed.
I think investors got scared by the possible fall in prices of raw materials, aluminum, etc.; and secondly, the great capex announced by Hindalco. That puzzled some of the investors because a big capex was announced at the top of the cycle. Capital spending typically comes in at a lower end of the cycle, and those debt problems arise in commodity companies.
My view on commodities and I may be dead wrong is that once this disruptive phase is over and monetary tightening unfolds, the deep distress in China combined with the Covid woes will lead to a significant slowdown in commodity demand. Right now the move has been more due to supply disruptions, but eventually in the coming months we could see a sharp decline in many commodities and investors should be wary of all commodity stocks.
Will underperforming companies starting to participate in the market continue?
Preparing for quarterly results, it will be very difficult for many of the companies to beat earnings expectations. So where there is a chance that companies can do much better, and I think it will be spaces where there was a significant reduction in spending by people, the outgoing sectors like hotels, restaurants, multiplexes, shoe and luggage companies. All of these companies are pretty well placed and I think that’s where we’ll see the momentum.
Some of the retail stocks could still do well, although the way cotton prices etc have gone up, there will be inflation in clothing prices. We need to see how that translates and those will be the spaces that will outperform. We could still see outperformance from stronger companies that are in the construction infrastructure space because that is where order flows have been strong and the year ahead could be very good for execution.
So that problem of higher raw material prices hitting margins remains for most companies. That is something we have to deal with. Consumer names were hit. Some of them have bounced back a bit, but the next three to six months will still be very difficult for these companies because the outlook for consumption in India is quite weak at the moment.
DMart is down 15% year to date. It is below Rs 4,000 per share now. Would this be a decent entry point for you?
Sandip Sabharwal: Valuations are still high but dynamically things are looking up because in times of high inflation people are looking to find value and to that extent value retailers like DMart should ideally benefit. My guess is that their sales outlook could improve, but the margin outlook is still a bit shaky and valuations are still very high. I would still stay away. There is some potential for positive surprises going forward, but personally I would wait for better levels to buy.