It will take some time for that system to re-energise or to find its feet again. Expect volatility for next one month, says the Founder, Capital Mind.
Do you think there would be further weakness in the market both globally as well as locally?
There is obviously going to be some pullback. Currently, I do not know if this is healthy or if eventually it turns out to be unhealthy but a correction is always acceptable because you need a little breathing space. Having said that, the economy does not look great. On stockmarkets, we have had one set of numbers and the next set of numbers will start coming in October. So fundamentals would not be as great even in this quarter except for some sectors. This rally is fuelled a lot by liquidity. Some of that liquidity has reduced because of some of the new Sebi norms and such. It will take some time for that system to re-energise or to find its feet again. Meanwhile, the market is seeing a little bit more downside as well and perhaps some intermediate up days. We will be volatile for the next month at least.
What is the outlook when it comes to the capital goods sector? Would you stick with quality names like L&T within this space or do you see a lot more opportunity within capital goods?
We are invested in L&T and honestly it is at a price you have seen last in 2008. So between that time and now, apart from infrastructure business, it has sold parts of the lower margin businesses. It has built up L&T Infotech, L&T Technology Services and recently acquired MindTree as well. If you add all of this, there seems to be a lot more in L&T than it used to be in 2008 and we are getting those valuations today. The fear right now of course is that the government would not have enough money to spend. If that argument stays, I do not think the economy is recovering at all because everywhere when there is a downturn, the government has to spend money to boost the economy.
What are you making of the ITC commentary?
As much as I like ITC as a company and use its products, I no longer use their tobacco products but the FMCG ones. I think they have been struggling to convince the world that they can actually use the capital that they generate out of the tobacco business more effectively in the FMCG and other businesses. Capital allocation on hotels has not really worked out so far. So let us wait and see how they scale going ahead more.
I am not invested. I want to invest but always something holds me back and perhaps it is the price that does not seem to move as much but I am hoping for ITC to be the next thing in the next 10 years. Let us hope that happens and maybe then we can invest more in it as well.
If not ITC Hotels, what about Indian Hotels? That has seen a fair amount of run up from the March lows.
This is where we are seeing a dichotomy. I do not think the hotel occupancies are phenomenal but there is going to be a big rush to at least their leisure destinations going forward, once all these lockdowns end. All of us will want to take a little break and go somewhere and Indian Hotels is known as one of the best brands in the business. There are people in cities right now using the business hotels as escapes from their daily grind. But these are very small, the fundamentals will take at least a year to play out.
If the markets are willing to wait for a year for results to show up, that is when we will see some good returns on the stock. I believe we have discounted a lot in the price already. Right now, it is priced a little too much to perfection and any hiccup will hurt it. There will be hiccups in the next three to six months. Right now, it is a good stock but not at a great price. I do not think I will want to participate at this rate.
What is the outlook on some of those MNC stocks which have been consistent performers? Would you advocate investing in stocks like Pfizer, Nestle, AstraZeneca or P&>?
I wish I could say anything was safe in this market but they have done really well in the past. I do not think they are safe but some of these stocks have extremely high price to earnings ratios. Some part of it is attributed to the fact that there is relatively better corporate governance in these companies and very high promoter ownerships.
The stock prices tend to be very high on an absolute basis. You get something like a Nestle at Rs 16,000 plus or a Honeywell at Rs 32,000. We own a bunch of these stocks even though they are extremely expensive because some of them will continue to have extremely good growth as well like Honeywell. But some of the others have ordinary growth. They are priced very richly.
If anybody wants to buy them, it should be spread over the next 12 to 18 months, hoping for prices to average down if you want a five to 10-year holding period. Remember that in a sudden move up, when the markets are euphoric these stocks do not participate quite as well either. So you are going to be willing to lag down a little when the stocks move up and outperform when the markets fall. That is the kind of picture these stocks give you.
Holding MNC stocks in the past used to be because of a number of reasons. Now the newest reason will be around dividend. A lot of them are cash rich. The dividend tax DDT has been removed and they can actually utilise some of the cash that is generated in India in their global ventures and so they will be willing to pay a higher dividend. We saw that with SKF India. That may be the short term play here but one should look at these stocks for a 10-year or 15-year period.