What has triggered this numbness for the market in the month of December? Is it China or is it pure profit booking?
I am as clueless as you are and I think that sometimes market does its own thing and then reasons come afterwards. But I think it is very difficult to fathom this news in the market at this point of time. There is no adverse negative news flow yet. We had a 5% sort of a correction and now again we are seeing a turnaround in the markets from last three trading sessions so I guess it is just trading in a narrow range.
Tax breaks, jobs or plan to beat China: What will Budget 2023 offer? Click to know
When it comes to news flow one could expect lower volumes and more sideways movement and the real action would start only once the earning season is underway. Of course first week of Jan we will have the auto numbers and some of the other companies will come out with the December quarter early reviews but by and large I think the real action will start second-third week of January when we will have the earnings coming through.
What to your mind will be the dominant theme for Indian markets in Jan? Will it be China/COVID, recessionary fears in US and Europe or budget expectations?
I would go with the last. Budget expectations and the earning season will be central in terms of news flow. We can expect a lot of positives as well as negative outcomes based on these particular two events per se. I think we heard so much about COVID in China, recession in US and Europe, higher inflation and higher interest rates in 2022 that if we get positive news from there it can provide a more supportive and a more strong foundation for a rally and it may take indices to new highs as well. So I am not too perturbed about what is happening globally, I think that was the central theme in 2022. 2023 is going to be all about the economy reviving in India and all about consumption spending, capex cycle moving up, more of real estate and more and more of infrastructure projects and more mergers acquisitions. I think these are going to be the central themes, the central news flow. 2023 is going to be a very interesting year and could be a great one as well unless there is again some adverse news on the global front which we have not discounted or which we have not even thought of at this point of time.
Wanted to get in your thoughts as to what the outlook is on new age tech? We were talking about the massive carnage that we have seen in global FAANG stocks. The market cap erosion has been quite tremendous for the likes of Apple, Alphabet, Meta etc. Back home we were also discussing whether or not the next year is going to usher in more focus on cash flows, profitability and thereby perhaps a flattish to better year for some of these new age tech stocks that have had a pretty disastrous year gone by?
On the contrary I think 2023 could be a great year for new age tech stocks and if you look at the new age Chinese stocks the dragon index and all the number of listing which they have in China I think those have done exceedingly well in the last two-three months or so. It has gone pretty much unnoticed and we are seeing a lot of action over there in the Chinese internet businesses from a lot of private equity investors as well. And something similar could play out in India as well. I think it is too early to write off these businesses, these are driven by exceptional promoters and they have created fabulous niches and they have changed the way a lot of the consumption patterns are taking place globally. In India it is just that the road to profitability is what is confounding many investors but we are getting more and more positive communication from the managements.
So I would say that let us not write off these companies, they are in a very high growth zone and you could be surprised on the kind of numbers they can report on top line basis and some of the other quantitative and qualitative matrices on which we judge these companies.
So I think that 2023 could be a great year for these companies and we should all have some of it in our portfolio like an option which we own that if in case it does well and they could truly turnout to be great value creators and even multibaggers over the next four-five years or so.
What would be those names because obviously this phenomenon is not going to work across the board? Which are those top two or three bets you believe in the new age platform world?
We like and that is one business which I think is going to go from strength to strength. We are seeing them add new labels and now they are going the brick and mortar way as well and it is a fast growth category and they are expanding into number of sub categories as well over there.
Second of course is
, I think as they look to try and breakeven on the core food delivery business, it will only be Blinkit which may still drain the company in terms of net losses per se. So in our portfolio we are having these two companies, not looking at or CarTrade or some of the other new generation platform companies but we have them on our watch list and at some point of time these companies also can be quite interesting.
I am pretty certain that come May 2023 you may have many more listings coming in from such new age digital businesses, the new unicorns. I think it could be education space, could be hospitality. I think you could see them look at today’s listing within. There are no secondary markets as well so let us keep a look out for these businesses as they are outstanding businesses. It is just that valuations is a bit of a question mark over there.
I am curious about your take on the entire Adani Group of stocks. I do not know whether you actively track them or not but like them, hate them, cannot ignore the fact that they have been massive wealth creators for the year gone by with the kind of market capitalisation as well that they command. What is your view on these stocks going into the next year with the massive acquisition plans, big M&As that have taken place within the entire Adani Group?
I think all the underlying fundamentals are good, the business strategies are great and clearly they are going into areas where there could be sustainable growth and decent cash flows as well. But it is just that the valuations are so high and so compelling that you cannot really justify investing in these stocks at this point of time. I think a couple of years ago had you known that this is a kind of aggression and these kind of growth plans of the promoters then maybe you could have invested in these companies but at that point of time we had got too much into growth stocks and some of the new age digital companies. And I think we and the Street missed out the kind of growth potential that Adani Group stocks could have displayed. So I think the time to buy perhaps has gone considering the valuations that these stocks are trading at and all you can do is just watch them go up higher and higher.
This was in a sense the space where everybody was treasure hunting nothing has changed if at all the supply chains have got better. If at all the energy issues are getting sorted out yet some of the chemical/specialty chemical high fliers have got completely grounded this year?
I have a slight different view here that some things have changed and the hyper inflation which we saw in 2022 had an impact on the operating profit margins of all these specialty companies.
These are essentially B to B businesses, it takes a while to pass on the raw material price increases and that cause a squeeze in the margins and in some ways it dons upon investors that these are not businesses which can keep on scaling up and maintain their operating profit margins and keep on growing irrespective of what the external environment is.
At the same time I think the entire boom in specialty chemical started about 18 months or so ago and that was the time when a lot of managements planned for capacity expansions. So a lot of these companies are in the middle of commissioning large capacities or Greenfield plans and that could take them under the next growth phase as and when those plans are commissioned but underlying fundamentals are strong.
I know that China plus one strategy is great but it takes a little bit of time to play out as well. The supply chain out of India reconnecting, re-establishing, getting all the permissions and the quality approvals does take some time but Indian specialty chemicals companies are on a very solid path and typically after you have seen such a rally you can expect a correction which is what we have seen but do not write them off. I think these stocks seem to have bottomed out, it is just a matter of time when we see their operating profits start to inch up again and as and when volume growth comes to because of higher capacity commissioning you could see these stocks coming back into reckoning.
Valuations also have got in a way compressed and they are now I would say in a reasonable zone and you could expect outperformance or positive surprises from all of many of these companies.
Which is one large corporate group you would like to monitor for 2023 because of the businesses or because of the nature of the businesses or the positioning of the businesses they are in?
Just one name HDFC. I think we will see the merger of the bank in 2023 and the housing finance company and a lot of the uncertainties around that merger and what impact it will have on the net interest margins and how much provisions they would have to make and the balance sheet issues will get sorted out. But at the end of the day I think it will be a big growth driver. Both companies would have then reached an inflection point and I think that once the
has assimilated this large acquisition you will see it outperforming as it has not done so.
I think thankfully as far as the weightages in the indices that has got sorted out which was a big concern on the part of the investors because lot of ETFs and lot of the foreign focussed funds wanted to invest in the MSCI high index stocks.
So that is one group I think that one should watch out for and certainly we and our clients have a overweight position in both these companies, I think they should do very well. Small companies like
, also have been in a sideway zone and slightly correcting as well. But they are essentially growth companies and you could see them also coming up pretty well in 2023.
Is the EV story getting sour now?
I have not given much thought to it reason being that in India it is not such a big stock play per se like Tesla. Indian investors do not spend in Tesla and for us our choice is M&M and
and to an extent and Tata Motors is more about JLR.
So while all the Indian four wheeler companies do have some play or some strategy when it comes to EVs but it is not the central part of their business and these models or these businesses, these divisions for them to start contributing materially I think at least three, four years away or so.
I think some of the high part of the EV certainly has come off because of the way globally these stocks have performed and not just Tesla, I think, some of the Chinese electric vehicle manufacturing companies also have had a very poor stock price performance in the last year or so.
But I think these are great long term trends and you keep them on your watch list, at some point of time they will tend to surprise you. The thing about growth sectors and growth stocks is that when they actually start to fructify and they keep on building on the base which they have on a consistent basis in two, three years, four years they suddenly become so big and it gets so noticeable and at that point of time they get really expensive and difficult to buy as well.
So we have to track them and buy them at the nascent stage at which they are just now. The kind of impact that EVs are having in the two wheeler space that certainly is going to affect
, , as well because if you see on the road there are more and more of these electric scooters coming through whether it is Ather or Ola Electric or many of the other new players as well.
There is a silent transmission taking place in the two wheeler space and right now I think it is like 4-5% or maybe 10% of the volumes but who knows in two years we could have 30-40% of the scooter volume coming through from EVs.
So there is going to be a massive disruption when it comes to the two wheeler space in the next year or two and we should watch out for that. There could be new winners and losers over there and that is something which is going to be quite interesting which will play out in the near future.
What were your top three holdings at the beginning of 2022 and where are you ending the year with them?
It has not been a great year. The top three holdings have not done well and that is one of course is
which has underperformed after almost a decade plus. I think had a good year but we have seen a sharp correction from the peaks.
The third one I think has done well that is
. I think that has done pretty well for us this financial year. As is the case with a lot of investors, we have been too much focussed on growth stocks. But all that has worked in 2022 are the value stocks. What has not happened in the last 10-15 years is that the stocks which have not moved, the sectors which have generally destroyed value or have gone nowhere those are the stocks and sectors which have done exceedingly well in 2022.
I suspect that the first half of 2023 will also go to those kind of stocks and sectors. The entire PSU basket, fertiliser companies, some of the low PE stocks, the railway companies are the ones which have done exceedingly well and maybe first three, four months also will go to these companies.
While growth stocks generally have been moving sideways, earnings have generally kept pace but PE ratios have necessarily compressed and maybe give them six months or maybe a little longer and you will see growth coming back.
I have seen this phase many times in the market, you have that one or two years where value stocks come into play but it is the growth stocks eventually which create multiyear, multi decade value and one needs to be a bit patient and keep the conviction going.
How do you see Bajaj Finance moving for 2023? Could it go like what some of the consumer staple companies are doing? It gets into time wise correction so it starts with a bad year and then two, three flat years, could that be the trajectory for Bajaj Finance now?
I think it has become a more mature business. At one point of time
Bank and before that HDFC was a growth stock like Bajaj Finance created huge amount of value and really surprised investors consistently growing at 25-30%. But then growth rates started to normalise I think that is what is going to happen with Bajaj Finance as well.
It will be a good stock to be invested in if you want to benchmark yourself against the Sensex, Nifty and get returns more or less in line with that. But gone are the days where you can expect Bajaj Finance to multiply from these levels as well. Clearly I think we need to look for other multi bagger stocks and smaller companies to go for the next wave of wealth creation in our portfolios for ourselves and our clients. These are all stable, mature businesses and you will see them move up in tandem or in line with what their earnings per share growth is. You cannot ascribe a higher price to earnings or price to book ratio for a Bajaj Finance or even a Tata Elxsi for that matter.
Any new year’s resolutions that you have and any top recommendations for the next year from the midcaps? You were talking about some of the railway stocks, we also discussed what a fantastic year it has been for defence, would you venture there?
Not really. I think those themes have played out and we remain growth investors. One theme which comes to mind for 2023 is speciality retail space and there are quite a few interesting listings over there. Companies like Vedant Fashion, Campus Active Wear, Metro brands, Ethos and Landmark are some of the companies to look at.
I think they certainly are growing at a fine clip, 20-25% thereabouts, valuations are expensive no doubt but the runway for growth and the kind of network expansion plans which they have and the balance sheet quality and how they can grow without taking on any debt from internal accruals that is what interests us in all of these companies.
So that is where I think we are looking out for. India is on the move, there is a rising wealth effect, rising income effect and consumption patterns are changing. We are going from unorganised to organised, all of these things we have seen it play out but I think after perhaps a pause in 2022 we may see a resumption of these investment themes in 2023 and beyond.
So that is where we are going to focus on in 2023. I think trying to buy value stocks after they have rallied by 70-80% really does not make sense because at some point of time when investors realise that growth is not coming through for these companies you will again see a long sideways movement over there.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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