I was a little scared with the price action on Friday afternoon which was followed by yesterday’s weakness. The FOMC meeting begins today. Then there is the Evergrande fiasco. A risk appeared to be flavoring the US stock markets last night. Could we go into some kind of consolidation for our markets?
Things like the Fed’s tapering and rising interest rates are widely known. It is clear that they are waiting for inflation to skyrocket. This is not a problem, growth is important and inflation has been largely contained around the world. The decrease will therefore occur in the United States. The default on Chinese home loans is actually that part of the market. Hopefully this will be contained and that’s the only risk. But if not, individual stocks that have been sold like Indian metallurgical companies actually get good valuations; and sectors like IT and pharmacy are safe havens anyway. So from that perspective, there is some foam in some stocks, but the overall market looks okay.
Traditionally, we have even had corrections as deep as 15-20% in a raging bull market, but even if there is a 5% drop, would you be tempted to buy that drop and if so what would buy? -you ?
If you start with metals which are a global commodity, all of these companies like
, Jindal Steel, is trading at around 4 to 5 times EV over EBITDA at current prices. So if they go down 5-10% that would make them a lot cheaper than their usual valuation which is around 6-7 times easier. . So from that point of view, if the market corrects by a certain amount, it is clear that the buyers will come in and we would step in as well. On the other hand, there are stocks whose multiples have increased very significantly and they will see larger corrections. . It is better to proceed with a little caution.
On the topic of energy, we’ve seen the markets reward companies that really do things and not just advertise.
Yes indeed. If you look at green energy, today India probably has around 20 percent renewable energy which is solar energy, biogas, etc. i.e. 50% energy from fossil fuels like coal and 50% from green sources over the next 10 years.
Now, to do this, it is not only the solar panels that will get you there, but a lot of work needs to be done and it has been done all over the world in terms of smart micro grids. These are the elements that can manage energy from different hydraulic, thermal, solar sources and manage demand in real time across industries and consumers. For all of this to happen, a lot of investment is needed. So it won’t just be about the growth of the solar industry or renewables, there will be corresponding legacy systems; the existing electricity grid and India is one of the largest in the world. To achieve this, we will need digital technologies, a large number of electronic devices and that means large-scale innovation over the next decade. A number of businesses will benefit.
What about the theme of reopening hotels to movie theater owners? Will it be a very short theme to play?
We are entering festival season and hopefully there won’t be a third wave. Some industries like information technology and pharmaceuticals give good pay rises, so the consumer is confident, has the ability to spend, and waits for the unlock to happen. As this happens, unlock trades like Thomas Cook, PVR Indian Hotels,
, PVR, Sterling will benefit. Not all of these companies have performed well in the past year. The service companies are going to come back and there is still a long way to go in terms of rising these stocks.
What is your strategy for raw materials and steel in particular?
For steel stocks, it is clear that if the Evergrande situation turns out to be a little ugly, it will have a huge ripple effect on all kinds of metals and commodities as well as on the credit system in the whole world. So it’s clearly a risk, but I hope the Chinese government gets it under control.
But apart from that, China exports 20% of the world’s steel. Now, if Evergrande snowballs, it’s going to put upward pressure on steel prices, but of course, that will balance out with declining local demand in China. But the main thing is that the demand for steel in the world, outside China, is very strong, emerging from the pandemic. As steel companies pay off their debts, balance sheets get stronger. Tata Steel is only trading around five times EV / EBITDA, which is a consistently lower mid-cycle valuation. We still haven’t reached valuation peaks.
Jindal Steel & Power is probably around 4.5 times. The list is therefore quite long and certain. They will be volatile, but there are still plenty of returns that can be achieved over the next six months if Evergrande doesn’t become an issue.
What about the IT sector? Do you have a feeling that IT stocks could be in a long-term, multi-year bullish cycle, valuations put aside?
The government has made a good decision in deciding not to impose GST on IT service companies as the majority of them operate in India and cannot be considered an additional service. That aside, software as a service is a very big area, and they have accounting software, human resources software, financial software. There are 80 types of software and rather than buying a license, with software as a service you can buy it as a service and the growth curve is going to be very big in the future. He barely started anyway.
Then we will see a bigger growth curve than what we saw in the case of the Cloud. Now to implement all this Indian IT companies are needed. Income streams only develop over several years. The margins are good. The margins will always be in this band – never too strong, never too small. So, valuations are good and they can still be a steady rise in IT in large and mid caps.