In tech, are you looking outside the obvious four-five names?
In tech, for the longest time, we have been very bullish on Tata Elxsi and L&T Technology Services (LTTS). Both these ERD companies will do very well. Tata Elxsi has already come out with Q3 numbers. They have done industry leading topline growth and industry leading margins. LTTS results are awaited but they are also expected to be very strong.
After a long time, within the midcap IT pack, the stocks that we really like are Larsen & Toubro Infotech (LTI), LTTS and Tata Elxsi and that is where we have put our bets on. There is still significant upside left in these stocks over the next 12-24 months even after the recent run up.
What is your view on the entire divestment drive? There is a lot of action across those PSU names?
Privatisation/divestment could be a big game changer this year from a macro perspective. But we have seen too many fits and starts in the past and amongst the existing divestment/privatisation pipeline, market would be looking at BPCL, Container Corporation, Shipping Corporation and Air India.
Even if two of these four companies are divested, then the entire PSU pack can get rerated. The proof of the pudding is in actually getting this executed. The problem is every time the stocks rise, there is more offering and more supply. But having said that, we need to see real action on the ground and once that happens, there will be significant opportunity to make money in PSUs.
What are you making of the commodities segment?
So we are witnessing a very strong commodities rally. There has been under investment in the commodity space for several years and with all the major economies of the world putting in large amounts of stimulus and spending focus on infrastructure, commodities should enter a very good era over the next couple of years. Meanwhile, in the near term we have seen a very strong rally. There could be some pause and consolidation but the rally in metals and cyclicals has definitely more legs left and it is a long-term structural theme as long as the dollar remains under pressure and the central banks continue to keep monetary policies loose.
Also, China has recovered very strongly. The economy has also been relatively strong and every country has put some sort of import barriers. There is focus on inward spending, more like the Atmanirbhar Bharat that we have in India and that is likely to amp up the metal story globally. We are on to something structurally great there.
What would you factor in if we are looking at broader markets because retail investors are always the first to get burnt in any kind of correction?
From a macro perspective, the biggest risk comes from a disorderly or a very quick rise in inflation. Oil prices have started to move up. I think we would be okay with oil prices up to $70-75. If it goes beyond $70-75 and stays there for a long time, it could stoke inflation and then the RBI which has continued with an accommodative monetary policy may have to change its stance.
We are seeing a nascent recovery in the real estate sector thanks to low interest rates and better liquidity, which can also support growth in the near term as we recover from the pandemic. The only thing that we need to be careful about is a sudden spike in inflation or if oil prices were to go up dramatically in a very short period of time. But other than that, broadly we are fine.
As for retail investors getting into the broader markets, over the last couple of months, retail investors have done exceedingly well having bought during the lows of the markets last year. Many of them are sitting on pretty good gains but if they think that they can make 30-40-50-80-100% returns every few months, that is not likely to last. It never lasts.
There is a phase in the market where momentum is very strong and you can invest on your own and make money, but if money making was so easy then nobody would actually do anything else. So, people have to be careful and not get carried away by the momentum. They should stick to good quality companies because usually when the broad markets tend to do well. the good, the bad and the ugly all move up. The rising tide pulls all boats up and when the tide goes down, then things become very difficult. So I think we should have reasonable expectations of returns. Having said that, we continue to be very bullish on the broad markets over the next 24 to 36 months.
How have you looked at the recent IPOs?
In the early stages of a bull market like the one that we have seen in the second half of 2020, IPOs get a very strong response because there are fewer IPOs and people who have not been able to catch the rally in the secondary markets tend to participate very vigorously in the primary markets. With liquidity being abundant, last year during the lockdown, people had a lot of time. People were sitting at home and trading and investing.
But soon the laws of physics catch up. As entrepreneurs understand that a lot of IPOs are doing very well, they start pricing their IPOs higher and higher and then these extraordinary returns that you make in the first round of IPOs, tends to peter out as that trend matures. It is very difficult to make a generalised statement on how one should look at IPOs, but I one should look at each company on its merits.
It really depends on a) the quality of the company and b) the valuation at which the stock has been offered. Some of these IPOs were very reasonably priced and of reasonably good quality. Quality and price are the two things that you need to see going forward from here. The IPO pipeline will continue to be very robust in 2021 because every time there is a great market rally, there is always a huge line of issuances of paper which is waiting to hit the markets. We will see a very active IPO market next year and investors should look at each one on their own merit before investing in the IPOs.