Closure of plants in countries such as the EU and China owing to increasing environmental concerns has opened doors for Indian manufactures to invest further in specialty chemicals.
India-China border dispute is a decades-long tussle – it is an extremely important matter politically and may have wider ramifications on the geopolitics of the South Asian region in the long run, Devarsh Vakil- Deputy Head of Research, HDFC Securities, said in an interview with Moneycontrol’s Kshitij Anand.
Q) How do you see a standoff between India and China impacting markets in the near term? Do you think that if the tensions escalate further it could take the Nifty towards 7,500 despite positive global cues or liquidity?
A) India-China border dispute is a decades-long tussle – it is an extremely important matter politically and may have wider ramifications on the geopolitics of the South Asian region in the long run. But, I am of the view that it may not have an immediate impact on the financial markets.
Q) The India-China standoff could actually lead to various suppliers reworking their agreements if they are based out of China?
A) Over the last decade, the core of the chemical industry has shifted from the West to Asia, with China being the key benefactor.
Manufacturers in the Asian region enjoy low labour costs, relatively relaxed environmental norms, and government subsidies.
China’s chemical industry continues to dominate the sector. This is reflected in rising China’s share in global chemical sales, which increased from 24 percent in 2010 to 37 percent in 2018.
During this phenomenal growth period, the focus of China was more on infilling the huge and rapidly growing domestic demand.
Closure of plants in countries such as the European Union and China owing to increasing environmental concerns has opened doors for Indian manufactures to invest further in specialty chemicals.
Recently Chinese suppliers have raised the prices of various active pharmaceutical ingredients (APIs), key starting materials (KSMs) and certain drug intermediates, by more than 20 percent. This is a major worry for Indian customers.
Companies in the chemicals and agrochemical segment that have weak backward integration will be impacted the most due to this spat between India and China.
Q) Foreign Institutional Investors (FIIs) which were net buyers in early June have turned net sellers in the last six trading sessions as on June 17. What is pushing FIIs away and will the rating action by FITCH will pull more money out of India?
A) FIIs may have sold stocks in the last few days, but they are still net buyers to the extent of Rs 20,000 crore in the month of June.
Markets across the globe witnessed correction during the last few days. Key indices in the mother market United States also witnessed a 10 percent correction from the recent highs. This may be the reason for some investors to take some money off the table.
Over the medium term, optimism surrounding signs of improving economic conditions, the flood of monetary and fiscal relief efforts, as well as progress out of the Health Care sector on finding COVID-19 answers will continue to provide support to markets.
Q) After the recent turmoil which we have seen in Indian markets it looks like Value investing is more of a hyped concept, and has completely failed in India. What are your views?
A) Value investing has professed Benjamin Graham preaches investors to focus on an earning yield. He preferred stock trading at least twice of AAA bond rate, dividend yield at least 2/3rd of AAA bond rate, the stock price at least below 2/3rd of tangible book value per share, and play for the mean reversion.
This approach obviously is not suitable for high earnings growth markets.
In India, companies with pristine balance sheet quality and superior earnings growth have been attracting disproportionate amounts of capital and we have seen their earnings multiple shooting through the roof.
Whether it is value, momentum, or growth – no single approach works all the time. Investors will have to remain agile and keep adjusting their portfolios according to what is working in the markets.
We have seen that as long as investors stay away from low-quality junk stocks, and focus on companies that are trading at a reasonable valuation and exhibit above-average earnings growth – investors tend to make a good amount of money by investing in such stocks.
Q) What is your call on the telecom space and the recent commentary from the Supreme Court on the AGR issue?
A) We have a positive view of telecom as a sector. The Supreme Court heard the AGR matter on June 18, 2020 related to a petition filed by the Department of Telecommunications (DoT) to allow telecom companies to make a staggered payment over a period of 20 years of their remaining dues.
The Court directed telecom companies to provide their financial documents and gave the Department of Telecommunication (DoT) time until July third week to consider the proposals by the companies on making payment for the AGR dues.
We believe eventually a solution on the lines of a staggered AGR payment would be given to these players. These will mean more free cash flow to strong players like Bharti and breather time for Vodafone Idea.
We expect a 15-20 percent tariff hike for FY21E and Vodafone will sell stake in other non- core assets to raise resources.
Q) Small & mid-cap stocks have been outperforming the benchmark indices so far in June. Do you think that investors are ignoring the visible risks and just betting on growth potential?
A) Smaller socks peaked in January 2018 and have been correcting while Nifty made new highs in 2020. Due to COVID-19 led correction many of the quality small and mid-caps also corrected sharply along with Nifty.
These stocks have seen severe correction and were trading at a mouthwatering valuation in March. In the last few weeks, we have seen stability in the indices and those select mid-cap and small-cap stocks surging.
We can’t generalise as a category small and mid-caps are risky. But, some stocks where corporate governance and earnings visibility looks fairly okay then definitely one can even see a further rally.
This is the space to concentrate on the above-average return. But, be selective and wade cautiously, you shouldn’t get carried away.
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