How are you playing the entire China trade? Is it via speciality chemicals, is it via textiles or some other sector that you are betting big on?
In speciality chemicals, even the sourcing mix was changing before the power outage impacted chemical production because here the approval cycles, the gestation period is less. We already saw that in the results of a lot of leading players. For example,
. Now DASDA prices are up and their performance portfolio is going up. The specs are good but the top line and the order book started shaping up much earlier because typically the sourcing mix takes about 12-18 months in this case and so that is one way to play.
But one has to be a little careful whether this is short term play or more sustainable because there is a lot of strong demand from the end user segment which includes dyes, pigments, paints, agrochemicals, textiles etc. Any company which is completely integrated, both backwards and vertical and has very less or no dependence on China will stand to gain over the long term. So that is one way to play it. Deepak Nitrite despite the ru up is still at about 30-31 times FY23 earnings which is relatively cheap.
APIs and the entire CRAM space is a more long term play. In textiles also we are tracking a few names including Vardhaman and KPR Mills. KPR Mills is a vertically integrated player from yarn to garments complete value chain. They are the largest in knitted garments, doing almost 160 million pieces. They also have capex now, related to a new facility as well as the new ethanol plants. So, it is a combination there. One has to play it more at a bottoms up basis and not get carried away. I take a beta call on the entire space.
Midcap IT are expected to be outperformers and there are a few stocks to watch out for. What is your view on the space?
We are keenly watching the quarterly numbers as they come along. I think the deal-win momentum will remain strong. We saw the Accenture earnings and the commentary. We should see a strong demand environment. In fact, amongst the larger names, while TCS had a soft Q1, one could probably see another 4% constant currency growth.
with the Daimler deal should give them more consolidated gains. That it itself should contribute between 1-2% again on CCC terms. I would just like to watch the margins a bit. The key thing to watch out for is wage hike and attrition. The ability to repurpose talent, have more annuity type deals would be a differentiator between how these IT companies progress and at 35-40 multiples even in midcap IT names and the large cap IT names.
I do not think one should play it as large cap versus midcap. Go with the actual deal win and actual commentary and then build on it and purely on a bottoms up basis. Also, while we keep talking about Cloud, we should remember that most of our IT companies are enablers. The pure Cloud play is more the Amazon or the Microsoft and the Googles of the world. So a combination should be there. May be a FAANG ETF or a Nasdaq 100 and Indian IT should both be part of the portfolio. Also, valuation wise, some of these names are available at 26-28 earning multiples.
What do you see in terms of some of these large public sector banks? Are they still buys at this point? Is there a lot of value to unlock?
One has to be a little careful with the entire PSU pack. We have seen multiple catalysts. There was capital infusion by the government on two occasions and we saw a sharp run up and then it again came back. Most of them trade at 0.4 to 0.6 book value. I would stick to the top one or two in terms of size. SBI to me looks the best of the lot. In the last four years, their gross NPAs are down 43%. Their SMA-1, SMA-2 books give a lot of comfort on the credit cost guidance. The restructured loans which was again as per the guidance. The asset quality metric is actually better than some of the tier-1 private sector banks. On CASA, liabilities, overall advances, they have gained market share.
Their subsidiaries — be it SBI Life or SBI Cards have done well and – one would possibly see listing of the mutual fund in a year or so. This bank is still at about 1.1-1.2 book value and looks best of the lot on a risk adjusted basis.
If one wants to do a bit of bargain hunting, one can consider Bank of Baroda or Punjab National Bank, but I would stick with SBI and go with some of the better private sector banks. ICICI Bank is still at about 2.5 book value, great transformation happening since the leadership change. Even HDFC Bank has consolidated as the leadership transition is now behind it. I will stick with the larger two, three names rather than go for bargain hunting and value buying.