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DAILY VOICE | Patchy monsoon, subdued Q1 results raise fresh concerns about economic growth and market valuation: Deepak Jasani of HDFC Securities

Markets globally are facing concerns of inflation, slowing growth due to Covid-2 and Covid-3 waves, and rising interest rates. The worry is whether the coming inflation is likely to be transitory or may extend over more than a quarter.

July 29, 2021 / 07:16 AM IST
 
 
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Deepak Jasani, Head of Retail Research, HDFC Securities, feels that patchy monsoon rain in India and subdued Q1FY22 corporate results have raised fresh concerns on the economic growth and market valuation.

A Chartered Accountant by profession, Jasani has broad-based domain expertise of more than sixteen years in capital markets.

In an interview with Moneycontrol's Kshitij Anand, Jasani said that the valuations in the market are high and there is little upside possible as far as the benchmark indices are concerned.

Edited excerpts:-

Q) Market hit fresh record highs in H12021 and the momentum is continuing at the start of H22021. What is driving markets – FOMO, TINA or plain liquidity?

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A) Markets today are driven by keenness on the part of traders and investors to make the most out of the current up move. One can call it FOMO or whatever else. Of course, the abundant liquidity sloshing around the globe is aiding the up move.

Also, people who have sold in the earlier panics in 2016, 2018, 2020 have seen the prices of their stocks recovering sharply in the next up move.

Hence, they are now reluctant to sell shares even if it means seeing a temporary downside (in the hope of eventual recovery).

Large amounts of money from retail and HNI (diverted from other avenues including debt) has helped stock prices/indices rising without any major correction so far.

Markets globally are facing concerns of inflation, slowing growth due to Covid-2 and Covid-3 waves, and rising interest rates. The worry is whether the coming inflation is likely to be transitory or may extend over more than a quarter.

Supply-side issues (due to covid restrictions, container shortages etc) also have contributed to the specter of rising inflation.

Patchy Monsoon Rain in India and subdued Q1FY22 corporate results have raised fresh concerns on the economic growth and market valuation.

Overall, the valuations in the market remain high and there is little more upside possible as far as the benchmark indices are concerned.

However individual stocks that have adapted well to the disruptions over the past 4-5 years and grabbed the emerging opportunities well, can still do well from here (although with some intermittent corrections).

Q) Retail investors gulped down Zomato IPO in the first 1-2 hours of opening -- a record of some sorts despite knowing what they are getting into. What is driving the optimism there? We saw record anchor investors, as well as MFs, subscribing to the issue? Is it like a Gold mine which investors will miss in case they don’t get an allotment?

A) There are diametrically opposite views on Zomato IPO. The believers feel that the IPO is an opportunity to participate in the new-age business whose unique dynamics may lead to sustained growth in topline which could result in a positive bottom line over 2-4 years.

On the other hand, the naysayers feel that the IPO is priced exorbitantly as it is yet to make profits and is not likely to make profits in the next 2-3 years and the pricing of IPO is at a 49 percent premium to the last P/E round that happened barely 5 months back.

Retail investors have lapped up the issue on three counts.

One, the trend of recent listing gains attracted them; two, the grey market premium was another reason for them to apply in this issue, and third, they want to participate in the new age businesses from the inception. They are already aware of Zomato, its services and its unique strengths.

As the issue has been priced steeply, we do not think it will run up sharply from day one. Investors may get a chance to evaluate the progress of Zomato, compare it with other new age businesses which will get listed over time and then take a call as to whether they would like to take an exposure or raise it.

Q) Apart from Zomato there are many tech-based platforms that might be hitting D-Street in H2 namely PayTM, Policy Bazaar, etc. among others. What are your view on them? Will they turn out to be the next wealth creators?

A) We will be able to evaluate and subscribe to many new tech-based platforms over the next few months. It is a reality of life that these businesses will gain importance going forward.

Each of these IPOs has a different model, revenue kickers, target customer base, and competitive challenges. These, apart from the valuation, will have to be evaluated by the investors before taking a plunge.

If market conditions remain good, they could be priced steeply (based on historical parameters), get listed at a premium but the real test will be when the markets do not remain as buoyant and these companies face new challenges – expected or unexpected.

Some of these may also be included in the frontline indices and may offer scope for lasting gains. However, all of them will not generate wealth.

New technologies also mean that technology that lifts their fortunes will also bring them down when a competing technology takes a bigger pie of the market or a bigger player does M&A activity whereby the incumbent player faces serious challenges.

Hence, one will have to be selective and need some luck to bet on the right stocks so as to create enough wealth. The value of platforms of these new-age companies is a nonlinear function of the size of their networks. However, identifying platforms is subjective.

Network effects are a phenomenon whereby additional users enhance the value of a product to its existing users.

In the process, we will have to learn to value a stock through different lenses such as price to sales (P/S) and enterprise value-to-sales (EV/sales) though we have to be aware of the need not to get carried away by these lenient valuation methods in undeserving companies.

Q Manmohan Singh’s July 24, 1991, budget speech is considered as the harbinger of economic reforms in India. What is your take on that? Do you think the best of the reform years are already behind us and what this means for investors?

A) Though brought in under compulsion, the economic reforms of 1991 brought about expansion of the services sector helped largely by a liberalised investment and trade regime. They also increased consumer choices and reduced poverty significantly.

The reform program soon became wide-ranging and opened up the Indian economy to the world, setting India on course to become the world’s sixth-largest economy in nominal terms three decades later.

India’s exports soon included advanced information technology (IT) services, earning the country the sobriquet of an IT powerhouse.

Although we have trudged a lot of distance of reforms over 30 years, we have many more reforms measures to undertake. We still have to improve the fiscal situation on a sustainable basis and bring down India’s debt levels.

For this, the tax-to-GDP ratio has to rise from the low 8.1% to at least 17-20% (for Brazil & Russia). Land, labour, legal, and policy reforms are the few major reforms still pending, for which states will have to come on board willingly.

Reforms to deliver efficient public services, particularly focused on the long-neglected social needs related to nutrition and health services, primary and secondary schooling, a major quality upgrade of tertiary education, water supply, and sanitation are also pending.

Privatisation of PSE is another area of reform that needs urgent attention. Each large bunch of reforms could lead to upside in the markets through the impact may not be uniform across companies.

Q) Small & Midcaps seems to be surging ahead of the benchmark indices and are trading slight premium to largecaps which has not been the case for long. Does that make you cautious on this space? What are your view and what should investors do?

A) Indian listed companies have benefitted over the last few quarters due to easy liquidity lifting stock prices and a series of disruptions since 2016 to which most companies have adapted well.

Small and midcap companies were under-owned and their rate of growth in revenues and profits from the FY20 base seems faster than most largecaps.

These companies have also realized the power of market-cap and have undertaken measures like acquisition, demerger, sale of businesses, buybacks, etc. to enhance shareholder value.

Investors spend a lot of time and effort in identifying the small/midcaps which can turn into mid/largecaps over the next 3-5 years so that they can earn large-sized alpha.

It is also a fact that along with some key beneficiaries in each sector, a lot of their less deserving peers have also risen. Investors should hence do a review of their overall portfolio and particularly of their small and midcap portfolios to weed out such also-rans and retain only the key beneficiaries. By doing this they will be able to right-size the number of their stock holdings.

Q) Which sectors are likely to take lead in the second half of the year 2021? Where is the smart money moving?

A) As the lockdowns come to an end and sectors look for mean reversion, Automobiles, PSU and Oil & Gas are few sectors that could do well in the second half of 2021.

However, stock-specific interests and movements will continue as investors flock to the happening stocks in an effort to earn alpha in a market that discounts news/developments quite fast.

Q) What is your call on IT space – you prefer pecking order between Infosys, TCS, Wipro, and MindTree?

A) In terms of upside potential based on our published reports, Infosys, TCS, Mindtree, and Wipro - in that order are the preferred stocks in the IT space based on their Q1FY22 results and guidance.

Wipro has caught up to a large extent on earnings and valuation differential after the improvement in their numbers over the past few quarters. Mindtree has shown revenue outperformance in Q1, all-time high bookings and hiring reflecting strong demand, and improving revenue profile (broad-based).

Infosys has positively surprised the street by raising their revenue guidance for FY22.  TCS continues to show strength in core segments despite the Q1 miss on India revenue and continues to gain market share.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Jul 29, 2021 07:16 am

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