Infra is a pocket of value right now: S Naren, ICICI Prudential
In a chat with ET Now, S Naren, ICICI Prudential, says one has to bet when earnings are bad and in this cycle, earnings will come. Once earnings come, people will give elevated multiples on those earnings and then the market gives outlandish targets.
Edited excerpts:
Which are the pockets pf value in this market?
There are too many pockets of fear at this point of time but clearly infra is one pocket where investor experience in the last cycle was pretty bad and due to which people are not willing to look at that sector at all. The number of companies which are solvent and which can construct roads must have come down by about 50% in the last 10 years. Is the business opportunity for road, construction worse than 10 years back? The answer is no. But the number of players are down by about 50%. When I look at the greed-fear cycle metric, I would say that right now infra would be clearly one of those areas where it is still difficult to get money. But that is one area which I would say is a pocket of value.
Other than that, if you look at it this debate on earnings growth, if you look at what will happen over the next one year, the area where the biggest growth in earnings is going to come is in the metal sector. How many people are willing to buy metal stocks? What happens is that frankly every industry has a cycle. Currently, if you look at sectors like financials and telecom, you will find that they are going through a negative cycle in earnings primarily because of the many problems which have happened over the last 10 years. But there the earnings outlook is good for the next three years. So one will have to bet when earnings are bad and I believe that in this cycle earnings will come. Once earnings come, people will give elevated multiples on those earnings and then the market people will give targets which are outlandish. That is what I think is going to happen.
What Nilesh Shah rightly mentioned was in every area, the government has worked to reduce margins and customer interest. What you gain as a customer, we near realise. Look at the industry like say mining, mines were given free in the early 2000. The profits were coming out of free mines. Similarly, in telecom, spectrum was almost free. So again telecom industry made a lot of money.
In sectors like LED lighting, basically the entities which have been created are working to reduce margins. We are actually creating a much better cycle for economy and that cycle does not lead to great earnings but leads to lower inflation, who considers that LED lights in inflation in index, so you have inflation index based on some old may be incandescent lamps or something like that. So, there is much more scope for interest rates to come down if your economy is becoming efficient. But people see financial savings as benefitting only equities.
Financial savings will benefit fixed income equally well. There again, over the last few months, there is a fair amount of fear, there is a fair amount of disinterest. People have lost money so that is another interesting area we have seen at this point.
So for you the red marker would be when crazy benchmark or crazy Sensex and Nifty targets are coming out?
Yes clearly and that would happen after elevated earnings come or the investing community create the next gross merchandise value kind of valuation method. What it will be in the coming cycle I do not know and I am waiting for that. If top line oriented model of investing comes, I will worry a lot.
Edited excerpts:
Which are the pockets pf value in this market?
There are too many pockets of fear at this point of time but clearly infra is one pocket where investor experience in the last cycle was pretty bad and due to which people are not willing to look at that sector at all. The number of companies which are solvent and which can construct roads must have come down by about 50% in the last 10 years. Is the business opportunity for road, construction worse than 10 years back? The answer is no. But the number of players are down by about 50%. When I look at the greed-fear cycle metric, I would say that right now infra would be clearly one of those areas where it is still difficult to get money. But that is one area which I would say is a pocket of value.
Other than that, if you look at it this debate on earnings growth, if you look at what will happen over the next one year, the area where the biggest growth in earnings is going to come is in the metal sector. How many people are willing to buy metal stocks? What happens is that frankly every industry has a cycle. Currently, if you look at sectors like financials and telecom, you will find that they are going through a negative cycle in earnings primarily because of the many problems which have happened over the last 10 years. But there the earnings outlook is good for the next three years. So one will have to bet when earnings are bad and I believe that in this cycle earnings will come. Once earnings come, people will give elevated multiples on those earnings and then the market people will give targets which are outlandish. That is what I think is going to happen.
What Nilesh Shah rightly mentioned was in every area, the government has worked to reduce margins and customer interest. What you gain as a customer, we near realise. Look at the industry like say mining, mines were given free in the early 2000. The profits were coming out of free mines. Similarly, in telecom, spectrum was almost free. So again telecom industry made a lot of money.
In sectors like LED lighting, basically the entities which have been created are working to reduce margins. We are actually creating a much better cycle for economy and that cycle does not lead to great earnings but leads to lower inflation, who considers that LED lights in inflation in index, so you have inflation index based on some old may be incandescent lamps or something like that. So, there is much more scope for interest rates to come down if your economy is becoming efficient. But people see financial savings as benefitting only equities.
Financial savings will benefit fixed income equally well. There again, over the last few months, there is a fair amount of fear, there is a fair amount of disinterest. People have lost money so that is another interesting area we have seen at this point.
So for you the red marker would be when crazy benchmark or crazy Sensex and Nifty targets are coming out?
Yes clearly and that would happen after elevated earnings come or the investing community create the next gross merchandise value kind of valuation method. What it will be in the coming cycle I do not know and I am waiting for that. If top line oriented model of investing comes, I will worry a lot.
