View: Long-term investors, start profit taking

IT midcaps probably still retain some value; one can continue with pharma stocks only from a momentum basis. There is no great undervaluation there, says the independent market analyst.Should one buy into this weakness in both Reliance as well as private banks?It is a difficult call to take for the simple reason that the market had a one-way rally and it is looking a little stretched. But that said, I do not seriously think that there any turnaround is likely in the near term unless we see something adverse globally. For now, the results in the US seem to be tracking the kind of performance that we have seen for at least the FAANG companies and that would mean that with the US market remaining reasonably strong, there is no particular reason for emerging markets to weaken suddenly. I would imagine the buy-on-dip market continuing for some more time. However, for a longer term investor, it may be a good time to start taking profits because even if there is 5-10% upside from here and I would doubt that in the near term there is anything more than that. It is better to leave that on the table and move out because there is no real value in most of the stocks that you mentioned including Reliance. What is a safe pocket then? Would it continue to be IT and pharmaceuticals? If there are dips in those pockets, instead of Reliance Industries or private banks, should one buy into those names instead?It depends on the timeframe you are looking at and in the near term, there is no great safety in pharma either. The market was under owned and therefore has gone into it with a great deal of fervour, but most of the companies barring a few have actually performed. The stock market performance has been such that it has taken care of any kind of under valuation that was there in and then some. You have to assume that pharma growth can only remain at its own secular pace, it is not as if suddenly people will start consuming a lot more pharma products. From what I hear, it seems that because of the lockdown, some of the things that you would normally expect, for example a flu or related illnesses like diarrhoea, have actually come down in the Indian market, mostly I guess because people are washing their hands a lot more and are more conscious of hygiene. Consequently, some of the more traditional areas of the Indian pharma market have actually tapered off very significantly. I do not think a great demand can be expected from this. Yes valuations were relatively cheap, but they have caught up now. Coming to IT, perhaps relative valuations are cheaper, but that reflects the fact that the market is a lot more difficult to penetrate. We have seen most of the frontline companies taking a pause and the midcap and smallcaps have actually started to do well which means that the relative valuation there is also catching up. So to answer your question in brief, IT midcaps probably still remain with some value. Continue with pharma from a momentum basis. There is no great undervaluation there. The only advantage with both these sectors are that they are not affected by what happens in India and are largely dependent on what happens globally. What is your take on the FMCG/consumption space? The space is very large and so different people have different views. That is one sector which has not really moved down too much. In fact, that is also the one sector which was not shut down during the Covid lockdown and has no particular reason not to perform other than some upsets in the supply chains. Britannia for example has reported sterling numbers largely because some of their competition had not managed to get the supply chain in order and they were the only play in town. Things like that will tend to happen but the sector overall remains expensive. It will continue to grow at its own pace, you have to remember that it was a single digit growth way before Covid started and it is very likely to remain a single digit growth for the most part. The valuations have not given up at all and so there is not much other than a portfolio play where you maintain your position in FMCG and stay with it. It is not likely to be a great outperformer from here on because the delta in terms of earnings will be among the lowest as there was no reason for it to have fallen anyway. It seems that the government is all ready to impose some restrictions on imports of Chinese goods, especially electronic ones and it would trickle down to some of the other imports as well. Are there any obvious beneficiaries?Any kind of protectionism where you are going to protect the domestic industry against foreign competition will help to increase their margins. It does not necessarily mean they will make better quality products. Essentially, it is the consumer paying the tax on the imports. Dixon Technologies, in particular, will be able to show phenomenal growth and analysts are forecasting that it will double its top line over the next two years. They are already rocking growth but the problem can you sustain that kind of growth in a country like India where you already have a lot of issues in terms of manufacturing because maintaining that growth with a margin of less than 5% EBITDA does not leave any scope for any kind of execution error. The fact of the matter is with a 5% margin, you are not going to be able to show profitable growth which is dependent on flawless execution. If you assume that they will be able to do that, there is no question that even at 50 times, you are paying one time price to growth. But with any kind of margin of safety, I would argue that 50 times forward earnings is not really cheap and you need to be a little careful. So long as Atmanirbhar plan is focussed on India alone, it is not really great for the consumers because you are just paying more. But it is perhaps good for corporates. They will get a little earnings pop up but to my mind, a protected industry deserves a lower PE.

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