What does the market expect from the budget this time?
I think the focus will be on the rural and urban poor and those who are still struggling. If you see, housing finance companies have already started working in anticipation that there will be more housing announcements.
Look at Home First, look at Aavas, look at the Shrirams of the world and Bajaj is soon coming out with an IPO of Bajaj Housing.
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So, there is a bounce back. There is some optimism building up in consumer names and rural focus names.
We have also seen some recovery in agrochemicals from where they were about a month ago.
So, I think the market is trying to build on this and that is why I am saying you have to see how much good news can come in the budget. But the government has more headroom. The fiscal deficit is 20 bps lower. Also, the RBI dividend. So, they have some headroom to do both capital expenditure and investment and be a little more populist and more rural oriented. Having said that, one development that I am watching outside the budget is whether gas can come under GST? And I think that will be a big re-evaluation for the entire gas value chain.
And many of these states which are gas producers, like Andhra Pradesh, Uttar Pradesh, Rajasthan, etc., are mostly NDA states. And if they get gas in GST, the input credit for companies on the value chain and then the effective taxation also gets reduced a little bit.
So, I would like to see what the slab rates would be and this is an interesting area and those companies have not really moved much, whether it is the generating companies like GAIL, or whether it is some of the city gas distributors, etc., so this is an area I am keeping a close watch on.
Can a categorical move into the IT sector be avoided except for the sporadic moves that we are seeing, or is there some sense in investing in the IT sector right now?
This can never be avoided obviously. You don’t know what goes up. The markets, the cycles get shorter. I think people had written off pharma and banks also for a while when interest rates were going up and we have seen people have written off PSUs also a few years back, who would have thought that the market capitalisation of PSUs would go from $200 billion to over $600 billion.
The whole sector, some of them have gone up to 5 times, so never rule it out. And I think valuations are reasonable in some of the bigger names like HCL Tech, even in Tech Mahindra to some extent with the new leadership coming in. But I think the focus should shift from services to more products, software and platforms.
If I may include it, there are many small IT companies like KPIT that specialise in CASE, which is Connected, Autonomous, Shared Electric, which is auto software.
I think we are focusing too much on certain names. HCL is doing very well in software. I don’t think the market is catching up with what they are doing. This is a 25%+ EBIT business for them.
Currently, it is just incorporated in the main company. And then you have platforms like the Zomatos and PolicyBazaars of the world, which I think have a lot of potential the way it’s moving forward.
So, I think you should look at the combination of ERD, software business and platform business with IT and maybe spend a little less on services for a few quarters. Once the US recovers, maybe services will also look good.
So then, what is the strategy as we get closer to the budget, which is hopefully coming next month, maybe last week or at least at the end of next month? Do nothing, just sit quietly?
I think sometimes just enjoy it. It is good to enjoy the gains and be happy with them. And wait for the bargains. Days like June 4 may come once in a while. But if you look at the last 40 years, every year there has been a correction of 10%. And I think India remains worth buying on dips, so be selective. There is no harm in being a little bit counter-cyclical, going into names where maybe there is a lot of bad news priced in and maybe rebalancing the portfolio a little bit.
I think wherever you have made 4x-5x profits in sectors like PSUs, railways, defence, I am not asking you to exit but take out some money and invest it in banks.
So, if you look at banks, there has been 25% EPS growth, but because of the FIIs selling, now Nifty is up only 13-14% as compared to Nifty which has been up above 20% for the last two years. So, there is some catch up there. And whenever the FIIs come back, they will catch up some at some point of time.
And as I said, work a little more on agrochemical names, maybe go a little deeper into IT and pharma. Keep a little counter cyclical portfolio, which is not preferred.
And also look at bonds. I have been saying this for the last six months, the price of a 10-year bond is now down to 7. It was 7.20 a quarter ago. In the next 12 months you are going to see a shallow cycle of rate cuts, which means even a bond portfolio can give double-digit returns. So, be a little more balanced and as I said earlier, lower the return expectations.
Would insurance also fit that definition? One of the many regulatory challenges it faced was the surrender value issue. But now everything, at least for the time being, seems to be out and known. Would you buy insurance stocks?
I think there is some valuation comfort in LIC. It is still below the embedded value. It is almost around the IPO price. It is just that the new business premium and their new business premium margin has been slightly lower. They probably need a more diversified portfolio. HDFC Life also from a high of over 750, it is still below 600.
It is also one of the best benchmarks in terms of new business premium as well as persistency ratio, which exceeds the policy term of three years and five years, as insurance is a long-term product.
So, maybe tactically it may make sense, but I am more constructive on the capital market play. Broking names like the Angel or Motilal Oswals of the world, CAMS and CDSL which is an RTA and depository, some of the exchanges.
Because here, if you see, we have hardly touched 10 crore unique customers till now. We have only 4 crore unique SIP holders. I think this number will go up.
For me, it is like a 5-year, 10-year period, fill it, close it, forget it. And in most cases, there is a monopoly, whether it is a depository, whether it is an RTA.
I focus more on the non-financial sector rather than insurance. I like some non-life insurance companies, like ICICI Lombard, etc. But we have very little exposure to life insurance.
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