What is your top pick when it comes to the auto pack?
If you look at the auto pack, metal prices have come down, commodity prices have come down quite sharply in the last couple of months. Hero Motors has raised the price of its bikes across price points due to higher commodity costs. In other words, they are trying to maintain their margins.
Also auto sales have been weak for the last two, three, four years and so on the back of lower commodity prices and the demand gradually coming back, valuations are clearly on their side and the auto pack will continue to outperform. Within that, across the board,
M&M and, all look good.
In the last leg of correction, fell to around Rs 1,300 and from there, we saw recovery coming in. The buzz is they are now going to focus more on Nykaa Fashion given that Nykaa which is the beauty and wellness platform that is already an established one?
Nykaa is trying to do a few things which are good for the longer term in terms of creating its own brands, using technology for greater penetration, trying to develop content around its cosmetics and across other brands and all those things hold well for the longer term .
Given that online penetration of cosmetics is still very low, in terms of valuation, I think it is kind of up there and so I would still stay away from Nykaa.
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If you are looking for a trade, it could be FMCG, it could be companies which consume a lot of soft commodities, it could be again airline companies. Is it time to relook at commodity producers?
Commodity prices are down because of a few reasons. One is of course all the various countries are releasing their strategic reserves – be it wheat or oil across the board .. Second, in oil, the US is renegotiating with Venezuela which had been under sanctions so all this with the view to increasing supply.
In anticipation of that increase in supply, the commodities have held off and now only if demand picks up, commodity prices will move up. If there is a demand destruction because of high inflation leading to this recession, then commodity prices will hold off. The big question is why are commodity prices cooling off? Is it because of the lack of demand?
Against that backdrop, many of the stocks including Tata Steel are now trading at close to 2006-2007 levels. But between then and now, the company has vastly improved. So I think, there is a positional investment to be made in commodity stocks in itself whether it is Tata Steel or Jindal Steel and Power. And because of the inventory benefit, some of the automobile companies will benefit from the lower prices. There is a trade and position investment to be made there as well.
What is the pecking order in two-wheelers according to you?
It would be the pure vanilla types which means first Hero Moto Corp then TVS Motors. The reason is that on one hand, the valuations are extremely attractive and they still trade only at about 15-16 times.
Second the volumes have been very low which means that whenever volumes pick up, the valuations will look even more attractive.
Third, these are credible players with large distribution networks and credible EV plans. So they are going to benefit both from the traditional petrol diesel vehicles as well as EV where they are doing significant work to be able to meet the future demand.
In this entire market rout, what have you bought and what have you added?
We have added some of the export-based companies like SRF. Second is
. The company is changing its profile and becoming more high margin business. It trades at about 11 times, earnings growth will be north of 20 times.
Second, again in the auto pack, we have added Hero MotoCorp and TVS Motors as well as Tata Motors.
has both domestic as well as foreign market exposure. It has both commercial vehicles as well as passenger vehicles and has both electric vehicles as well as ICE engines. They are across price points which is a very unique company whether it is domestic or worldwide and that is another company which we have added.
Accenture not just upping its guidance but also demand concerns saying that there is no visible impact of macro risks on client decisions. I know one can’t do an apple to apple comparison between Accenture and the other IT services stocks back home, but given the stark the commentary from N Chandra on the demand environment, what is the true picture?
Accenture has beat its guidance. They have 27% growth and that is a very big number versus their guidance of about I think 24-25%. Second, their margins also held up. Third, their order book is getting stronger. Both the outsourcing business as well as their consulting business is north of 26-30% and their outsourcing business holds relevance in the case of the Indian IT companies.
In their outsourcing business, they say their order book continues to grow and that there is very robust demand and no signs of slowing down. Financial services, media, communication all those various industries are spending quite big and that bodes well for Indian IT companies. Chandra’s comments were broad based.
The focus was not just on the IT sector but in general that inflation can cause a slowdown of the various sectors. The least impacted by inflation is IT outside of wage inflation. Currency depreciation benefits IT companies. So given the way they are, with the valuations having corrected and each of the stocks being down between 30 odd percent year to date or more so, given the trends that we have seen, Accenture’s outsourcing looks good.
When you talk of the IT space, what are you betting on in the midcap space or the largecaps which have seen a fair amount of correction? almost breached Rs 1,400, We seen what has happened with too?
All the stocks have corrected whether it is midcap or large cap. For instance,
is down about 40 odd percent, Infosys itself is down about 20-25%. Which are the companies which are likely to have the strongest guidance from that perspective? It is Infosys, and then in that order.
Those are the stocks which are looking good and, of course, midcaps also have corrected fairly significantly and so companies like Infosys or Eclerx are down like 40 odd percent and there also the demand remains intact.
When he went public everyone said that look it is a stock which is cheap, the margin of safety is strong and supportive but a Rs 900 stock has become a Rs 650 stock. Three brokerages are bullish on it, everybody is calling it a value buy, the price targets are lofty and stock is refusing to go higher. What are we getting wrong here?
That is a stock which to begin with was a value stock and has become more ‘value’ in the last couple of months since it was listed. Now what is holding the stock back? During periods of extreme pessimism, the discounts on PSU companies further widened. It is those softer issues rather than the fundamental issues which are holding LIC back. LIC is one of the strongest companies with a very big market share and the valuation is clearly on its side but it is the extreme pessimism which is adding further discount to its PSU status.
You are telling our viewers to buy something which is essentially in the business of making sugar water?
It is one of the best things to deal with, easy to deal with.
What is your price target for?
Varun Beverages is one of those companies which will tick along and grow and we are expecting 20% plus kind of a return just because it will keep growing its multiple as the earnings grow and a number of markets outside India are also opening up fast. Their distribution is a bit stronger. So, it is a compounding kind of a story rather than any individual catalyst taking it up sharply ..