Wednesday, October 20, 2021
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If we play the cycle well, there will be money to be made in auto sector: Anshul Saigal


Significant outperformance expectations are limited in the IT sector and there is definitely room for disappointment. However, this is not a long-term trend. IT is seeing significant tailwinds. There is a lot of demand tailwind in this space and getting manpower is becoming more and more tough, says Anshul Saigal, CIO, Kotak Portfolio Management Services.

How you are reading into the monthly sales data from motown so far? M&M, Tata Motors and Maruti clearly are at the receiving end of all the news flow. While it appears Tata Motors kickstarted the recovery process, even M&M found favour amongst market men, Maruti unfortunately has completely reversed all the mood after the management commentary yesterday.
Chip shortage is a running theme globally and has come to haunt Indian autos as well. It is reflected in how the recent commentary was made by one of the companies that you mentioned and the short-term impact in their prices.

But we think this is a passing phase. In the next six months, enough chips will be imported from international destinations and availability of chips for automobiles and other products should start looking up. In general, that should be a positive for volume growth again.

Stepping back from the recent trend and the monthly data that we see, if we look at the larger trend and take a two- to three-year time horizon, it looks like we are going to see tailwinds in this sector because this is a cyclical space and on that aspect, we are just starting the cycle and we are coming off a two- to three-year weak cycle. We are reversing that trend on a month on month basis. Because of various aspects, you may see ups and downs but that this is a long-term two-three-year cycle. We do not have much doubt that if we play the cycle well, there will be money to be made.

We are going to enter the earning season. This time around the markets are expecting outperformance. What are your expectations? What are you watching out for?
In general, the belief is that we are in a phase in this quarter where the base from last year is relatively high. So, to expect significant outperformance in the current quarter largely or mainly on account of profitability may be asking for a little bit much because a lot of the costs which were not there last year have come back into the system. People are advertising and business travel has started as well.

All that which was not there in the last year is coming back into the expense line in the current year. So there will be not a material beat if at all and expectations on that count are slightly tempered. Add to that the fact that valuations have run up quite a bit. So, there is not much room for error. Wherever we see disappointments, there will be price action which will be adverse and we will need to see, if not a beat on expectations, some sort of commentary from companies suggesting that the upward trajectory in earnings continues to sustain the valuations.This is going to be an interesting quarter to watch out for.

The IT sector has run up quite a bit, particularly midcap IT has done very well over the last one-and-a-half odd years. Pick a stock in that space that would have gone up four, five, six times from the March lows and that also is reflected in valuations. Stocks which were trading at 10, 12 times are suddenly trading at 30 times earnings and that tells us is that a lot of future expectations are already there in the price.

So one has to be slightly cautious in this sector. It is a slightly defensive sector but at these valuations, one has to be cautious in this space. I would say that room for significant outperformance on expectations is limited and there is definitely room for disappointment. This is not a long-term trend. IT is seeing significant tailwinds. There is a lot of demand tailwind in this space and getting manpower is becoming more and more tough.

There is significant tailwind and it is a long-term trend which is positive for the space but near term, one will have to be slightly cautious on valuations.



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