Is the long commodity story over now?
Commodity prices globally had a parabolic rise in the last 18 months. It got taken by surprise by the kind of demand resurgence that we have seen globally and more importantly, there has been significant supplier disruptions which have also impacted prices.
What we are seeing now is essentially some pullback in commodity prices and the after effects of that flowing into equity or stock prices. I still think that commodities could be in a long-term bull market but given the ferocity of the move that we have had in stocks or commodities companies, this pullback is probably much sharper and deeper. But I still think they could be in a longer term bull market.
At what prices would you be a buyer in commodities? Do you own commodity stocks? If yes, would you be looking at adding more?
No, we do not own any commodity stock at this point of time and generally, because of the inherent high volatility. We tend to avoid them but we revisited all our assumptions in terms of our outlook for commodity prices over the next few years and on the basis of that, we were relooking at all the commodity stocks and were waiting for a pullback. Now that we are witnessing one such pullback, we want to review our portfolio positioning as far as commodity companies are concerned over the next few weeks.
Are you positioning your portfolio for more safety and less upside or you are still in cyclicals and growth dominated themes?
We have been very positive on the outlook for the Indian economy and we witnessed that last year. When the economy unlocked this year, growth did get impacted because of the second round of lockdown that happened but as the economy unlocks now, our assumption is that we will see a very strong demand resurgence coming back into the economy because we see a lot of pent-up demand that exists in the economy.
Our portfolios are more inclined towards domestic consumer discretionary and demand recovery and at the same time now, we have come to a conclusion that we see a very strong revival of India’s investment cycle which has been completely missing for almost the last 10 years. So gradually we are aligning our portfolio to benefit from companies which will benefit from the revival of the investment cycle in India over the next three to five years.
How are you looking at the broader markets and approaching them?
The fact remains that Indian equities are in a long term bull market. Having said that, this has been one of the most furious bull markets that we have seen in a very long time, where for about 18 months, we have not had a meaningful correction or a pullback. So, any correction or pullback in the markets will be healthy because it will shake out some of the weaker hands and probably will be good for longer term interest of the markets.
My view is that investors should take a slightly more medium to longer term view of the markets and anyone investing with the time horizon, which is beyond one year, need not time the market. Any time is a good time to invest into the market. In this short term we can see some pullback or corrections because markets are overrated for the kind of momentum that we have seen over the last 18 months or so.
We have seen a furious rally in smallcaps and midcaps as well. One should be careful about the quality of the portfolio. Investors should move or probably sell some of the poor quality stocks or names in their portfolios and switch that to probably high quality names and that will hold them in good stead going forward.
today is a great quality company and one of the biggest franchises, but it was a midcap stock when it got hived off from Bajaj Auto. So three or maybe five years out, which are the businesses which you think will be relevant and the stock prices could surprise us? Where are you hunting? Are you sticking to HDFC Bank and or are you trying to identify the next Bajaj Finance?
We will try to do a little of both in our portfolios. There is no denying the fact that companies like Asian Paints or HDFC Bank or Bajaj Finance are phenomenal businesses and very strong businesses and leaders in their own sectors and industry. They have had phenomenal growth over the last 10-15 years and with the kind of competitive edge they have built in their businesses, they should continue to deliver healthy growth and probably continue to remain leaders in their business over the next 10-15 years.
Having said that, as the economy grows, that does not mean that new businesses cannot emerge and grow. Enough new businesses which will emerge and as the economy grows, probably the mix of the economy changes and new themes and new sectors will emerge. For example, once telecom was a small sector. Way back in 2001, Bharti was a leader in telecom and was still a midcap. Today, because telecom is a large sector, Bharti eventually has become largecap.
We find lots of companies in emerging sectors which probably are midcaps today but as the economy evolves over the next 5-10 years, these can become largecaps and that keeps happening every decade. There are enough companies out there which can become largecaps over the next 10-15 years. One classic example is hotels as a sector. That sector is coming out of almost 10 years of recession. Now, we are in a situation where over the next 10 years, the demand for hotel rooms in India will be much higher than the supply.
Indian Hotels being the largest hotel company in India is still a midcap if you go by market cap classification and probably they are custodians of one of the best hospitality brands in India — the Taj brand. I find Indian Hotels pretty exciting and we hold it in our portfolio. Likewise, I am equally excited about a lot of internet businesses and a lot of consumer discretionary businesses because once we cross about $3000 of per capita income, we will see a significant increase in discretionary spends by consumers and that will give rise to a lot of new companies and new brands over the next 10 years
held on while the market was down. Do you think ITC’s good time has come now?
I think so. The fact remains that there is deep value in the stock. Over the last few years, we have seen management putting focussed effort in terms of driving growth and improving profitability of their consumer business. The headwinds that they had in terms of very high rises in taxes which was hurting their cigarette volume growth is behind us. That stock should do well over the next few years.
Since we are talking about lockdown themes, what about food businesses like Burger King, Devyani International, FoodWorks. Is it time to look at West Life and QSR names?
Absolutely. As far as QSR is concerned, the penetration level is extremely low and these businesses over the next five to seven years, probably will have very strong tailwinds in terms of their own geographical expansion and increase in penetration. Secondly, rising per capita income in India because the rural subset of population which is their customer base is still very low.
Apart from Jubilant, other names like Burger King or West Life are still a metro or tier-1 play.We have not seen that level of penetration for them into tier-2 and tier-3 towns and cities and all of us know that a large part of India resides there. As these chains expand into tier-2 and tier-3 towns, they should do well. A lot of these businesses have reached a very critical mass. They should be a big beneficiary of the rise in discretionary consumption and rising per capita income.
Would you buy the fear into autos? Is this entire semiconductor issue overdone?
As far as the semiconductor issue is concerned, it is here to stay for some time because my conversation with some of the global experts leads us to believe that this issue will probably persist throughout 2022. So while things will improve incrementally and gradually, given the kind of strong resurgence that we have seen in demand around electronics, laptops, phones and so on, semiconductor or the chip companies are optimising their supplies and probably auto is not the first on their priority list.
So while things will improve from where they are, getting to a completely normalised supply chain for chips and semiconductors probably will take at least four quarters from here on. So, this issue is not going away any time soon. Having said that, within autos, we are positive on commercial vehicles. The commercial vehicle players in India should be a big beneficiary of both unlocking of the economy and pickup in transportation volumes or the freight volumes and also in the revival of the investment cycle as investments come back to the core sector of the economy for which demand has been soft for almost four or five years. Next year should be one of the best years for commercial vehicles in the last five years.