A big selloff has happened in the iron ore market and markets are curious to understand the importance of the FOMC meeting. Can you explain these factors for us?
Many people playing in the multiple markets are playing it under the assumption that the Chinese are cutting down on production and commodity prices should keep on moving up; but what most do not realise is that 70% of many of the commodity consumption comes out of China. So as the Chinese economy slows down, we hear about the crisis and its repercussions on the housing market.
The Chinese housing market could be on a decline for many years to come going forward given the kind of fall that has built up there. All that is not very good for steel demand in the largest consumer. That has had its impact on iron ore and will eventually flow through to the steel prices because finally with all the noise around the US infrastructure pipeline, it will take a long time for all that demand to come in. China is the biggest demand driver and to that extent commodities could soften more and on top of that, we have the rally in the US dollar index which is typically negative for commodities. This in my view could continue. Iron ore prices are 50% off the top. They could fall more and so could many other commodities.
Tapering is coming, but if the deadline is November, will that surprise the market?
Markets need a reason to correct and tapering announcement could be the reason or the markets could have started correcting even before that because markets normally fall under their own weight and to that extent, we need to keep on finding reasons why it has happened. Now tapering is an important decision for the US Fed because if they do not taper even at a time when the economy has stabilised and things are normal, job openings are more than the people actually looking out for jobs, then they are setting up for another crisis around higher inflation, which is normally tougher to control.
If they do not start withdrawing, then they are not ready for any new crisis which can come up so they need to have MO ready for any new crisis because interest rates are zero and they are buying a crazy amount of securities every month. My guess is they will go ahead with tapering now but when interest rates will actually go up remains a question mark because if this Chinese crisis is any example, they seem to have brought it on themselves by putting all sorts of restrictions on business etc. If the crisis on the real estate side becomes bigger, then the threat of inflation could be reduced from what it is now and the actual interest rate hikes could be postponed. It is a very complex scenario.
Now there are certain stocks that have seen massive up moves recently and it is all around the same theme of reopening. IRCTC is high by about 47% in the last one month; was high by nearly 11% in trade over the weekend. The government has now made it official that capacity in the air can go back to 85% by the airlines and lower cap fare is also going to go. How are you looking at the reopening theme and travel theme in particular?
The reopening trade is real and it depends on how one wants to play that trade. In IRCTC, I find the valuations obnoxious. The market cap today is around Rs 65,000 odd crore or more. At peak, they made a profit of Rs 600-700 crore in 2019 and that profit will not come for the next two years. It is a steady business but it is not a very high growth business. I would say that whoever has it and has made big money out of it, should exit now at this very good price. From here, I do not see any upside over the next two years. People who buy at these prices might not make any money and might actually lose money out of investing in IRCTC.
Interglobe Aviation is in a different space because of the sheer dominance of the Indian skies with 57% od market share. So, unless there is some regulatory action which restricts their market share growth, they are in a good space. As the reopening happens, the threat for them is that some new players are going to come in as the price restrictions go and we could see greater price competition coming in.
Jet is likely to revive; there is another low cost carrier which is planned and as and when Air India gets sold, the new owners might want to expand more aggressively because Air India has not been growing at all pending disinvestment. These are the risks.
There are other reopening trades like the hotel stocks which we still like. We have a good holding in Indian Hotels and I think they are still doing well. On the luggage side, there is
which did exceptionally well last quarter. Their sales were actually much much higher than what people expected and those are the stocks where the participation is low at this stage and to that extent, they could see a greater uptick as reopening actually gets entrenched.
There are various plays we can play that, people have tried to play multiplexes we also have a holding in Inox and I believe that play will also play out sometime in the next one or two years now it is all a question of patience that we just need to wait and when the actual reopening happens even the consolidation in the industry that play could also play out.
China’s property market heading into a slowdown is having a rub-off effect on commodity prices as well. Can that make the Indian real estate story even more appealing? Could funds allocate more towards Indian real estate?
This plays both sides; one is that if funds make losses in other countries, then their inclination to invest more elsewhere reduces. On the other hand, the Indian real estate sector which is now starting to come back after a hiatus of 10 years. This is the first year of revival after a decade and this revival stage will continue. I would agree that we could potentially see greater flow into Indian real estate projects, especially after RERA. So, project specific investments should pick up going forward as there are no excesses in the real estate. Unlike the rest of the world, where it has become very hot, the revival cycle in India should play out for the next few years.
Over the weekend, very small incremental changes have come in the GST following the meeting; one, food delivery companies will have to pay taxes. One can collect it from the consumers at the rate of 5% but by and large nothing has changed. Nothing has changed for cigarettes or tobacco, nothing has changed for hair oil or any other big categories?
Yes, nothing much changed on the GST Council except for the fact that they imposed some new taxes on small categories like carbonated beverages etc. Now on the food delivery front, the reason they introduced the tax was probably because there are very small operators who might not have a GST number etc and they might be just charging from the people but not paying up. The government wants to consolidate the entire move. I don’t think it is a bad move because in most cases, GST is charged at the consumer end where the final consumption happens. So, it should not incrementally impact any player by any significant extent.
There was some talk about possible inclusion of fuel under GST, which in my view is never going to happen. The central and state governments can collect any amount of tax on fuel now without offering any offset which state and central government has on fuel, if they get it into GST and they need to give the offsets that their losses could run into lakhs of crores actually. I do not think it is going to happen anytime soon. Never is a wrong word, I do not think it is going to happen in the next five years at least.
IRCTC is in limelight but there are small interesting subsidiaries of Indian Railways which could incrementally benefit as the capex improves and the railways starts modernising. As they sell more, privatise more, will they have more money to improve and rebuild capex?
There could be actually but I have not looked at any of them so largely PSUs I have been avoiding because there are only so many stocks you can analyse. So I am sure there will be but I am unable to comment.
What else are you analysing?
Opportunities are coming up in really under owned spaces. Given the kind of activities which have started happening on infrastructure and the real estate side, we have started taking a small exposure in the larger companies in these categories like Ahluwalia Contracts or NC. These are high quality companies which are totally avoided. They have good order books and execution will pick up significantly over the next two-three years while valuations are very cheap relative to the overall market and historical value. This is one space which could be interesting.
On the capital goods side, there could be some companies which could start looking interesting but then they have run up also so I think we need to wait for better levels.