There’s still steam left in the market; where to scout for new opportunities?

While on a notional basis, the Nifty is at 18,500 and the Sensex near 62,000 points but if you dissect it into sectors, there is still some steam left in the market, says Sanjay Sinha, Founder, Citrus Advisors.

What do you find interesting in the market? Are you in a profit-taking mode?
When the market ran up the way it did in the last one month, then even we had a certain level of apprehension with the elevated levels. But then we looked at the 16 prominent sectors which make up the market and we did a bottom up analysis of these 16 sectors and to our surprise, we found that except for one, all the remaining 15 sectors were either very strong on fundamentals or on momentum or a combination of both.

That means while on a notional basis, the Nifty is at 18,500 and the Sensex near 62,000 points but if you dissect it into sectors, there is still some steam left in the market. Now having said that, normally the markets run up ahead of the news and we now see that a flurry of good news is coming from all around. But there are three prominent spaces from which the good news will come and we have to see whether all of that is already discounted in the market or not.

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The most important is the news related to Covid. If the third wave is delayed or diminished, that is the best news that the markets can get. But there are other two prominent spaces from which the news can still come and surprise the market prominently.

Then there is the news from the fiscal front. Today you may have seen that the media is reporting that the tax collection may be higher than about Rs 2 trillion in this financial year. That will do wonders to the government finance and that is one space from where the good news has to come. The other space from where the good news has to come is from the consumption space and that will be a combination of affordability, interest rates and visibility of demand. So as long as there is still some good news to come, the markets may continue to be a little charged up, the way it is today.

How are you scouting for new opportunities? Where do you find improved risk reward in this kind of market?
One space where some more interest has come back is probably in the banking and financial space. Post the second wave, the load on the balance sheets of the banks were supposed to be very heavy. The asset quality was supposed to be very bad. But to our very pleasant surprise, it has not impacted the balance sheet so much from the regulatory front.

The initiative that the government has taken by way of setting up the bad bank also has lifted some of the pessimism on that count and therefore it is not very surprising that in the last three months, the PSU banks have rallied more than the private sector banks. There is probably some more space and some more steam left in that segment of the market. The other segment of the market where there is some more promise and which is a logical derivative of the improving financials of the government would be the infrastructure space. That space has been throbbing with a lot of activity but all of that probably has gone unrecognised by the market. So that is the other space in which we see that there could be some more promising opportunities going forward.

How do you rate the moves in the Tata Group? Which one surprises you most and which are the ones you are most confident about from here on?
One of the things which has remarkably changed in the recent past in the Tata Group is the willingness to monetise assets within companies to unlock value. We have seen how that was recognised and rewarded by the market in

Tata Motors

and also Tata Power.

There is some new vitality in the Tata Group as a whole and given the fact that it is a conglomerate with presence across so many sectors, you will probably see many more such opportunities coming up in the group per se. But having said that, the largest wealth creator in the Tata Group has been TCS. While the market may have reacted a little negatively to the results that they announced this quarter, given the amount of traction that there is in IT as a space, some of the Tata companies are doing well in the next couple of quarters, maybe the next couple of years too.

Which is the next largecap space where you see more re-rating happening? Do you see scope for mean reversion in private sector banks?
That will be a function of how well they navigate the change of the model which till now was more retail focussed, to become more corporate focussed. A larger part of their success in the past has depended on the very good franchise that they have built on the retail side. But now the overall stance of the banking space seems to be moving more in favour of the corporates and therefore how they deliver relative performance will largely be the function of how they now change their business models.

What about metals — both ferrous and non-ferrous? Are you out of it now or trimmed or fully invested still and riding?
Metal is a high risk, high reward game and therefore it is extremely difficult to have a very large exposure in that space. Whatever exposure we had in metal was in any way not very significant but we have trimmed at least 50% of the exposure we had.

Which are the most attractive stocks you find among the almost dozen pestment candidates?
That space looks very interesting for two reasons. One is that there is no denying the fact that there is a lot of embedded value in these public sector units, largely because of the assets that they hold. The other thing that is going to change about this sector would be the sentiment. A move has been made by way of the privatisation of Air India. That has lifted the scepticism that was there in the market that this will be a disinvestment in the garb of privatisation, like the one which has happened in the past with IBP being sold to IOC, MRPL being sold to ONGC and so on.

This time around, there seems to be a serious interest on the part of the government to look at privatisation and these valuable assets once they get unshackled from bureaucratic oversight and get more freedom to participate in the sectors in which they are. There will be a significant amount of value that we unlock. In the very near future, there are three-four candidates up on the block which all probability get completed in this financial year itself. These are Shipping Corporation, BPCL and most likely Concor also.

These will be the immediate ones but what will get rolling will be the entire positive circle of virtue that will start unlocking in many of the PSU plays and as a whole this place looks very interesting and it is also showing in the index performance.

What fear? Earnings could compound 28-30% for next three years: Hiren Ved

We are going to see very strong earnings growth over the next three years. I would not be surprised if earnings compound between 28% and 30% for the next three years, says Hiren Ved, Co-Founder, CEO, Director, and CIO, Alchemy Capital Management.

A lot of the market participants sometimes have the fear of missing out (FOMO) and at these valuations, new demat accounts continue to be opened and retail investors are flocking to Dalal Street. What do you make of the bull rally we are seeing?
There is both greed and fear simultaneously in this market. There are a host of new investors who are coming in which is actually a very welcome trend. We have been waiting for this for a very long period. A large number of investors who are now coming in are from tier II, tier III towns. They are more technologically savvy. They study the markets and come in. Yes, there will always be a small part of retail investors who come in just for the momentum, but then those are part and parcel of the market and that has given a far more depth to our market.

We no longer keep looking over our shoulders trying to figure out whether FIIs are buying or selling anymore because domestic capital is now deep enough and smart enough to take those calls. Having said that, there is also a fear that I sense when I speak to a lot of large investors. They do believe that markets have probably run up too fast, too quickly. There is a fear of markets being very expensive.

I have been telling them consistently that it is not just about liquidity. The big story about this market really lies in earnings and in a Covid year, if Nifty earning was up 20% and this year consensus earnings for Nifty are likely to be in the range of 27-28%, our bet is that Nifty earnings will surprise on the upside not just for this year but for the next three years.

We are starting a very significant new earnings growth cycle in this country after years of earnings recession; balance sheets are far healthier today than they were anytime in the past. And there will always be an occasional correction in the market but my conviction in this bull market is reasonably high and it is predicated on the kind of change that we are seeing in the economy, in the corporate sector. More importantly, our belief is that we are going to see very strong earnings growth over the next three years. I would not be surprised if earnings compound between 28% and 30% for the next three years.

Read Also: Midcaps and smallcaps to contribute to profitability this time: Hiren Ved

We have already got the Nifty trading at 24 times forward on a one-year basis. When earnings compound to the levels we are talking about, then these kinds of valuations do not suddenly seem as stretched and also of large investors red flagging.
Markets are forward looking and the reason why the markets are behaving the way they are behaving is because they are sensing that we are going to see a strong earnings revival over the next couple of years. Also, we cannot equate PE ratios in isolation. Every time in the past that our PE multiples peaked at 22 to 24 times, the interest rates were much higher. Today interest rates are much lower and therefore we need to account for that as well. It is quite possible that after a while, maybe for the next few months, the Nifty just consolidates in a range. By the time, earnings pick up, the PE ratios will normalise. It is good for everybody. If there is some kind of a time correction from here onwards or maybe markets could go higher and then time correct, it is very difficult to say but I am not fearful of the markets at all.

Do you see the runup in commodity prices in certain pockets playing spoilsport? Is that a significant risk on the downside?
In Q2 and probably even in Q3, we will see the impact of higher raw material prices and commodity prices which can put pressure on margins. But I do not think it is something that can derail the earnings growth story. Today what is happening is a little bit of a unique situation where higher costs and some kind of supply disruption is actually giving pricing power to manufacturers at the margin, especially companies which are able to pass on these hikes and where demand is reasonably strong.

For example, in automobiles, the auto industry is struggling with the supply chain and the chip issue and they are not able to supply as much but the demand is very strong. Look at the kind of bookings that XUV700 has got. Look at the waiting list that is there for some of the cars of Tata Motors and all the discounts have disappeared. In fact, second hand car prices have gone up.

In the case of the cement industry, while coal prices and costs have gone up, given the consolidated nature of the industry, they should be able to pass on the cost easily on to customers. So it will put some pressure on margins for the corporate sector for the next two quarters but for those who are able to pass it on, will see that an inflationary environment is accretive for earnings rather than causing head winds. So, we will be okay. Some of these issues are not so significantly permanent to be worried about. I am talking about a long-term trend in earnings. Investors will look through a couple of quarters of impact because of higher raw material prices.