Is it time to tread carefully given the kind of dip that one is seeing in the broader markets? Month to date, FIIs have been net sellers and consistent ones at that. Or would you say that the momentum is so strong that there is no option but to ride it?
Some caution is obviously warranted in pockets. Even the IPO mania is getting a reality check. The BSE IPO index is down by 5% this month and we have had a couple of sub-par listings. There has also been a healthy correction in the small and midcap space. One has to be selective from here on. A blanket standard beta rally at least for the medium term is probably behind us.
As far as high frequency data goes, whether it is the Nomura Business Resumption Index which is above 100, GST collections, power consumption show economic activity is clearly back. Hopefully, Covid third wave will not hit us. So one should hide where there is earning support. Do not buy growth at any price. When one buys very high PE stocks, the near term returns are always challenging. So pay for earning growth, pay for business performance over price performance and maybe keep some powder dry. As and when volatility comes, one can latch on to it. There are a few sectors which we are constructive on from a medium term perspective.
You were talking about keeping some powder dry for when the market does get a little volatile or we see some dip coming in. If that were to be the case what is it that you would like to buy afresh or buy more of?
We have been positive on a few themes like the specialty chemical space. The source mix has changed. In the export market for specialty chemicals, China commands a 20% share. We hardly have 2-3%. A lot of companies are seeing that shift reflecting in numbers. We like . They have been running at about 115% capacity led largely by their phenolics division. Also the new platforms on fluorination and photochlorination give future levers of growth. We continue to like . The valuations obviously are on the higher side but great innovation rate, great business mix, excellent ROCEs for last five-seven years.
We like some of the API names. There has been some correction in pharma. We have seen some amount of rotation correction happening. I think that it is a large opportunity. The biggest global pharma outsourcing companies are $4-5 billion. Our largest pharma outsourcing company is Divi’s, which is about $350 million on CRAMs side. So the runway is huge.
In technology, we are in an up cycle over the medium term. One has to be careful about valuations. One cannot pay 30-35 times for the IT services companies. We continue to like HCL,
amongst the larger names and in the midcap space.
What is your opinion on the QSR space?The buzz is that they have not been hit at all by the second wave of the pandemic!
The entire QSR space has to be looked at with different lenses and not the traditional approach. Obviously, 16-17 times sales at this is on the higher side. The investment they have made on technology, the way they have increased the delivery mix during the pandemic, newer smarter formats, adding more cuisines, this has emerged as a fairly structural story. But at current valuations, the near term returns can be tepid but overall pretty constructive on this space.
If you want to take home consumption broadly as a theme, valuation wise, one could look at something like Marico, which is doing very well, expanding into new food categories; one can look at Varun Beverage which is a little more reasonable. Everything is expensive in consumption space and so I am talking about relative valuations. I continue to like Tata Consumer..