Equity markets have held firm despite geopolitical and attendant tensions. We are not alone in this. The Nasdaq also saw an increase of about 11% last month. What explains this resilience?
Global flow analysis should not be used to make a prediction or make investment decisions per se because they should be based on market valuations, how specific sectors are doing and what the overall macro scenario is. The Indian market has remained very strong. Most emerging markets are now at a 100% premium and that warrants a much lower sustained move higher, given general macroeconomic headwinds related to crude oil inflation.
The whole history of the market has become very stock-specific, sector-specific, and that’s where people need to focus. The investment strategy should be based on that and potentially making a profit at some point. When you can buy at lower levels, you earn 20-30%. Otherwise, for this year as a whole, I don’t think we’re going to get a single-digit return on an optimistic scenario.
From a markets perspective, what would you like to hear from Bharti?
What we will want to hear is management talking about pricing discipline, pricing increase, how ARPUs are going to increase and they have shown that in the last few quarters, they have clearly outperformed the other competing companies in the market, both Jio and Vodafone. BSNL cannot be compared. Among the investable companies on the large-cap side, Bharti is still in a pretty decent position because even factoring in 5G capex over the next two to three years, there’s going to be deleveraging and sustained growth in profitability and that it will keep the stock afloat and the shareholder should be able to make decent money out of it.
Will the list of preferred banks move away from ICICI Bank and SBI?
We need to be very clear that interest rates are not going down from here and could be flat for some time depending on what the RBI wants to do and then eventually go up. In this scenario, the big banks have a significant advantage related to their CASA deposits and 50-60% low-cost deposits.
Therefore, the preferred bets should be only these companies. ICICI, HDFC and big banks similar to it. One of the challenges for banks next year and where analysts’ expectations are too high is that in most of these bigger banks like HDFC, ICICI and Kotak, asset quality is as good as it can be and, therefore, next year we will not achieve it. advantage of improved profits due to low amortizations. That’s one part.
Second, overall credit growth remains slower than most expected and is likely to remain slower than analysts’ expectations for the year ahead. So there is a potential downside risk to earnings next year, not related to the quality of the banks’ balance sheet, which is very good, but related to operations in general. That creates some short-term financial risks and PSU banks obviously have the risk related to high holdings of government bonds and what happens to those losses as yields rise. For SBI, officials have already said that if it goes above 7%, they might have some valuation-related issues. In that context, we have to look at the banks, but the larger banks are still good buys on dips.
What are you recommending for our viewers?
Right now, we’re looking for specific companies that have something going for them that can also work around macroeconomic hurdles and whose valuations are cheap. There is a company that we have been buying continuously on every downturn; is VA Tech Wabag and they set up all the water treatment plants etc. in India. Globally, they got a huge order book of around Rs 10,000 crore which is likely to run strongly in the next two to three years. They have been beating earnings expectations in recent quarters and our earlier concerns about debt on the balance sheet, higher interest cost, etc. they have disappeared since they have paid off most of their debt. Company valuations are 9 or 10 times next year’s earnings, which is pretty cheap. It is a stock with very little ownership and a good business profile. They should be able to generate strong returns for the next one to two years.
When we last spoke and you said you had cash. The market went down after that. Did you put the money to work?
Not so much because the markets went down and went back up. Too much deployment was very difficult and I still have 20-25% cash and that is a strategy that works well for me because then there are opportunities to buy some new ideas and some stocks when the market really goes down. We could not unfold as much in this depression without any of the concerns on my mind disappearing.
