Chakri Lokapriya on 3 factors responsible for market’s underperformance

“It has been a difficult market. We have raised more cash. We are sitting at about probably 7% cash. And so what we have done is basically lowered down some of the cyclical sectors, global sectors that is metals,” says Chakri Lokapriya, CIO & MD, TCG AMC.

It is a market which is giving everybody a reason to get worried about because whatever you are buying, you are not making money. Why is this market behaving in such an erratic manner?
I think there are a few factors. One post Adani’s episode, there was a certain amount of fear in the banking sector. If you look at the valuations of banking, they have all corrected significantly. Second, the US now is indicating that they will continue to raise interest rates, which means RBI will be forced to raise interest rates which means the cost of doing business for any company especially those with higher working capital limits will go up. So that will have an impact on slowing down the economy and slowing down consumer spending.

And third is I think a combination of these two. The profit margins of all these companies have come down. And new capex is unlikely by private sector because they are still sitting at only 75% capacity so there is no reason to do new capex, so I think a combination of all these three factors have led to the market performance . Then, of course, the catalyst was the initial corporate governance issue or rather potential corporate governance issue.

How are you keeping yourself busy in this kind of market then? I mean if you trade, you lose money. If you invest your NAV goes down. Are you sitting on cash? Are you raising more cash?
It has been a difficult market. We have raised more cash. We are sitting at about probably 7% cash. And so what we have done is basically lowered down some of the cyclical sectors, global sectors that is metals. Now with the correction in banking at least the valuations are looking more attractive so we are buying into some of the both the PSU and the private banks.

Consumer, as you mentioned, for instance, companies like Voltas have corrected fairly significantly in the past and now with the hot summer with valuations on their side and also the company trying to take back market share in some segments like the RAC I think it is time to look at companies like that.

Let us just pick up on that point in IT. I mean the AMS note on Wipro aside but would you feel that it is all not okay for the IT pack even though these stocks have shown a fair amount of rebound from the lows and maybe to some degree the bad news is already in the price?
I think the bad news is in the price because even in the face of a US slowdown recession etc. companies in the US will spend to increase productivity which means increase IT services spend and there seems to be no sign of slowing down in that except maybe one or two usual suspect like financial services and retail. So which means that companies growing their top line IT services in Indian IT companies whether it is Infosys, TCS, HCL technologies all of these companies are growing between 13% to 15% top line. And if they are growing the bottom line also around the same 15% odd and trading at between 25 times to 14 times depending on the company which means the earnings are intact, the valuations are on their side, and your order book is fairly clear. I think the stocks in the sector will outperform the overall index and the sector itself will be able to deliver absolute results.
Where do you stand when it comes to the PSUs because as per the RBI data there has been robust demand and healthy financials for some of these PSB’s across the board we also just saw Morgan Stanley’s latest note on Bank of India.
We have been buying all the PSU banks in the latest form and adding to our position simply because there are two or three fears. One was the Adani fear. Second is an election year whether they will be farm loan write-offs and therefore PSU banks will be affected. And third is whether the economy slows down then the loan growth will come down and bad loans will increase. So these are the three fears, I think if we take all these fears into account assume they are real and a Bank of India, Canara Bank PNB etc. they are all trading at about half a time book-0.6 times book adjusted book values.

So let us assume they do not go back to one time book value but go to something like 0.8 times book value that is a good 35-40% upside from or more than that of the current level. So I think it is more positional investments which we clearly are doing right now.