At a time when the fear of inflation has kept several investors away from IT stocks, Sachin Shah, fund manager, Emkay Investment Managers, is upbeat about the prospects of IT companies.
“We believe the mega trend of transformation and migration of businesses moving from traditional in-house servers to digital and cloud servers is a trend that will play out over at least the next three-five years,” he told Moneycontrol in an interview.
He believes this is clearly a bottom-up market. Several large-caps in the IT, private banking, pharmaceutical and automobile sectors are available at decent valuations and a few mid- and small-caps in auto ancillaries, power equipment, engineering and electronics manufacturing are attractively valued currently, said the fund manager who handles assets worth more than Rs 800 crore. Interestingly, he prefers private defence companies over state-owned companies. Edited excerpts:
What is your reading of the latest earnings season?
In the current earnings season, there is a clear trend of some slowdown on the consumption side. The slowdown is more evident in rural markets, albeit there are few categories where we are seeing slowdown in urban markets also.
On the positive side, businesses linked to capital goods, manufacturing and engineering have delivered good results. The new order inflows have ensured the order book for most of the companies is at the highest levels in at least the last four-five years. The management commentary on the outlook for the new order pipeline is also very encouraging, giving a decent visibility for at least the next 18-24 months.
Is this a stock picker’s market? Do you favour large-caps over mid- and small-caps now?
At the current juncture, it’s clearly a bottom-up market. In some sectors like IT, private banking, pharmaceutical, automobile, there are quite a few large-caps trading at decent valuations, whereas in some sectors like auto ancillaries, power equipment, engineering, electronics manufacturing, quite a few mid- and small-caps are attractive at current prices. So from that perceptive, this is a good time to build a multi-cap or flexi-cap portfolio.
Despite global headwinds, several market participants are gung-ho on IT stocks. Plus, many large-cap IT stocks have corrected sharply. Are they worth looking at, at this point in time? If so, why?
IT results and management commentaries, particularly of large-cap stocks, were quite encouraging. We believe the mega trend of transformation and migration of businesses moving from traditional in-house servers to digital and cloud servers is a trend that will play out over at least the next three-five years. This is a mammoth exercise for every large and mid-size global organisation and it is an established trend, which will accelerate with every passing quarter as consumers have adapted to the new age of their interaction with service providers and, therefore, it is pertinent for companies to adapt the change at the earliest. This is a very large opportunity for Indian IT offshore services.
Defence stocks are climbing. Do you hold any big names in your portfolio and what’s your logic for it?
Most of the large defence stocks are PSUs and generally our experience in investing in PSU companies has not been very encouraging. Plus, there is a fear of receivables being high as most of the clients of these PSU defence companies are the central government and state-owned agencies. But there are quite a few recent listings in the private sector and some of those companies are on our radar.
What are the sectors you are bullish on and what are you avoiding right now, and why?
We believe businesses which have opportunities on the manufacturing side both for the domestic and exports market are best positioned for at least the next two-three years. Companies in sectors like auto and auto ancillaries, pharmaceuticals, speciality chemicals, engineering, power equipment, electronics manufacturing have strong visibility of growth.
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