Talking to ET Now, Chakri Lokapriya , CIO & MD, TCG AMC , says credit lending was expected to pick up but is now likely to slow down following PNB fraud and alternate sources of capital raising like ECBs or corporate bonds or even QIPs are going to take centre stage and TCG is looking to participate in such investment deals.
Let’s start with the big surprise mover from the PSU banking space. Who would have thought that at a time when markets are trying to understand the implications of the PNB scam and how widespread it could be, the stock which actually has done well in a very choppy environment is IDBI Bank. I wonder what are markets excited about?
In terms of just PSU banks in general and also IDBI, the valuations are very extremely undemanding. What PNB Bank has done in this particular case is that it has further put a kind of suspicion over what are the future NPAs and therefore the value of the book. If you can get a handle on the book based on the current book, they are all trading at about half time book value unadjusted. In the current context, they are screaming buys but the only problem is you will probably see greater regulations in the coming few days and weeks which will put a lid on their upside.
The beaming sector in this market is IT. The kind of guidance which we have got from Accenture and Cognizant, the tone of IT outsourcing for 2018 which has been outlined by Gartner or the fact that Nasscom still feels that the Indian IT sector will grow in single digit — none of the forecasters are pointing to a great cyclical recovery in the IT sector. However, stock prices are following a different trajectory. TCS is sitting at a record high. It has been a 20% gain for across-the-board when it comes to midcap IT.
Indeed. In times of uncertainty, the market rewards visibility of earnings. While the growth rates are about 9-10% for the IT industry, individual companies will grow faster. The sector provides clarity of earnings and certainty of earnings growth. Now against the backdrop, midcap companies are trading at cheaper valuations which is always the case and now increasingly, there is talk that some of the midcap companies could be acquired or entered into strategic partnerships with other companies outside this country. That is also partly driving IT valuations up.
This morning also, it is about Sun Pharma. Brokerage reactions are coming in on the three observations for the Halol facility by the US FDA. Do you think there is merit in starting to dig up or starting to nibble into cases like Sun Pharma which has been beaten and thrashed down ever since the first murmurs of problems with the US FDA at the Halol facility began to spring up?
Whether it is Sun or Dr Reddy’s, the valuations of all these companies are still about their earnings growth rate or rather the rebound in earnings. Given that they have had a really bad last 12 to 18 months, any incremental resolution of FDA and FDA problems are really black white. Once you resolve it, the revenues come back. This is not the case with many other sectors where you can see a certainty of revenue. It is beginning to look good to bottom fish within Sun Pharma or Dr Reddy’s. At this point, it is more trading rather than investment I would think
But what about one of the cream investments of 2017? The whole debate about whether the cycle is topping out when it comes to steel is there. Should you be booking at least partial profits in some of the metal names where you have made so much return — the likes of Tata Steel, Vedanta? What do you do with metals now?
Metal stocks are very strong and in terms of the underlying fundamentals of metal prices, if you look at even Berkshire Hathaway, they got 29 odd billion dollars because of the tax changes in the US. When companies across-the-board are going to get this kind of money in varying degrees, that makes the balance sheet stronger and allows these companies to expand and any expansion involves metals of various kinds.
The scene is pretty murky when it comes names like Fortis though. I am shifting completely away from the larger sectoral issues here. What do you do with Fortis? Some of the marquee names have checked into the stock like Radhakishan Damani last week. The promoters, the Singh brothers, are assuring that they are not going to run away with any investors’ money and that investors should have faith. But at the same time, this is such an arrow in dark and the stock has been in a tizzy. Is this the right time to jump in or would you rather have a clearer visibility of what is really going on with Fortis and then buy into the stock?
Running away is the flavour of the season and there are too many moving parts and anyway the overall market has corrected. We have not spent any time on Fortis because there are too many moving parts and we think there is greater value in well run companies. I am sorry I do not have that level of detail on Fortis.
Do you think though that perhaps this dip or correction that we are seeing in PSBs could be more long lasting than just the last 10 days? Should this be used as an opportunity to buy into some of the bigger boys like SBI or for that matter BOB because when one looks at the BOB quarterly performance, the numbers were pretty good?
The valuations are extremely undemanding and banks frauds are something which is a routine part of business. Yes, this one was a big one at that and it could have been resolved fairly far more smoothly but anyway that is all water under the bridge and given that it is acquiring political turns, it is usually not good news for stock prices and especially the ones which are in the focus. We expect all kinds of increased regulations for the PSU banks and that is likely to put a lid on their upside. This is an election year but once we get past all of this, there are some stocks like BOB or SBI, which will do really well once you get past like a time correction over the next several weeks.
We have talked about the spaces which have outperformed of late — metals, IT, pharmaceuticals and we have also talked about opportunities across PSBs. What else are you hunting in this market?
Two things – one is what is the focus of the government which is infrastructure and irrigation and rural, and on the other hand, exports. So, yes, metals and pharma all come under exports as also chemicals. This industry is expected to grow its top line well in north of about 15-20% as an industry and individual companies growing much faster and in a chemical industry for various reasons because of China clampdown and acceleration of growth in the west has led to an acceleration of export from Indian companies. Companies like Meghmani Organics, etc, are expected to grow north of 35-40%. So you can say between 25% and 30% growth in the sector over the next two years.
You also highlighted infrastructure. Some of the road EPC players have done very well of late and then in the recent bout of the February correction, some of these stocks have definitely gotten cheaper and have also corrected from the top. Anything within roads in particular that you like?
Yes indeed. In terms of the recent correction, companies like Ahluwalia Constructions, PNC Infra, have all corrected 15 odd per cent and these are companies with good order books and valuations are not demanding. There is a huge government push for the rest of this year and therefore the earnings visibility is strong and these companies will do well and of course L&T is the largest company in that space. It has also corrected and so these are the companies that we would increasingly look at.
What is your current portfolio allocation? Are you fully invested, have you used the decline and every decline to buy in more or you are protecting cash and you are of the view that as the global risk unwinds, you could get better entry points? Are you looking for that extra 5-10% or you would say look I do not care because I worry about my 50% not my 5%?.
We have increased our cash levels in the recent past. Now we are probably sitting at about 7-8% in cash and also we have decreased our PSU bank exposure. Some outliers like BOB or SBI we continue to hold, on the other hand given that in general credit lending was expected to pick up but is now likely to slow down again because of government intervention, etc, alternate sources of capital raising whether it is ECBs or corporate bonds or even QIPs are going to take centre stage and we are looking to participate in such investment deals.