2022 is a tough year, protect capital! Play safe in your portfolio: Sridhar Sivaram

“In Q3, the surprises to a large extent have come from the financial space where we believe that the provisioning numbers over the next 18 months would significantly come down and private sector banks and PSUs in particular will significantly benefit and their earnings numbers will look very strong. Commodity is the other segment. Obviously, the way commodity prices have moved has shown a very strong earnings trajectory and it has been a mixed bag,” says Sridhar Sivaram, Investment Director, Enam Holdings.


They say that good news and good price rarely come together. Right now, news is terrible and horrible. Have prices become good?
We are flat for the year and so I do not think the prices are as great as we are making out the news to be. At least, my broad view would be that 2022 is a tough year, protect your capital, be in stocks where you are sure about the earnings; concept stocks and price to sales and some other random multiples can be avoided.

Finally, it is going to be the earnings that will protect the stock and even that may not help the stock but at least the damage may be much lesser. My broad view is that it is tough and there are a lot of risks – global, interest rates, inflation – the list goes on. Plus the fact that the market has actually rallied very smartly in the last two years and will need a breather. We do not know the exact reason. Some of it is paying out right now. It is better to be safe right now and that is my view. I am sure others will have different views. That is how we are constructing our portfolio for 22.

What are you doing with your portfolio? Where are you taking chips off the table? Where are you moving from high growth to value or from less risk to more defensive?
We have been doing that over the last six-eight months moving more to value, especially in the financial space. We have been very long on PSU banks. Look at their performance in the last one year; they have hands’ down beaten private sector banks. Not to say, we are bearish on private sector banks. We have a fairly significant exposure in the top three-four private sector banks but we have significantly upped our exposure in the PSU banks and at the cost of say NBFCs or some of the higher risky part of the financial basket.

So, that is one way of doing it. The other thing is wherever there is high growth and high expectation, we have already taken the profits and shifted to stocks where the earnings are slightly better. Metals is one name where we are very bullish on the non-ferrous segment in particular and the list goes on. In every sector, there is something or the other where one can mitigate the risk but that is not to say that if the markets were to have a sharp correction, these will hold. But they will possibly hold slightly better than many of the other stocks.

What about IT, we have seen the IT stocks come off considerably from their life-time highs.
IT is a sector where one has to be very stock specific. We cannot broad base as we are seeing a divergence in performance between the stocks. I would be underweight IT, but specifically overweight in certain stocks where the earnings visibility is very strong. One should keep in mind that IT in general has been a bit cyclical if one looks at 10-year performance. It is not as secular as it was in the past. One has to play this according to the cycle and how the valuations of the stocks are playing out. We are broadly underweight IT but we would be long on specific stocks where we think there is strong earnings momentum.

Would that be the blue chips over the midcap IT space? Also, we had seen autos make a move towards the end of last year. The big deal by Tata Motors had a rub-off effect. How would you also approach that space now?
In IT, it is a mix of broad largecap and the midcap and in the autos, I would have to split the autos into two-wheelers, passenger vehicles and commercial vehicles and possibly even tractors. On two-wheelers, we are significantly underweight. There is a slowdown in rural India plus the fact that in India we think that when EVs actually play out, it will be the two-wheelers which will first be off the block. It will take some time for passenger vehicles and for the other EVs to play out in the market because of the charging infrastructure. For a two- wheeler, it is very easy, one can charge at home.

Even some of those fears are playing out. People are deferring their purchases because there is a lot of buzz about EV scooters in particular and that is the segment we are very light on right now. The commercial vehicle part looks very interesting because we are seeing increased capex by the government. We are seeing demand picking up. There will be some lull in between because of some of the Covid-related issues but in general, that is the space which looks interesting.

There are also issues with respect to supply as far as passenger vehicles are concerned. Those supply issues will take some time to get sorted out. The commercial vehicle looks the best in the auto right now and that is where we would be putting our bets.

Given that the overall PAT growth on a free float basis has been quite robust on a year on year basis at 23%, how are you looking at the earnings trajectory that we have witnessed so far? Do any specific sectors that stand out?
As far as earnings is concerned, there is a general belief that January has been very soft thanks to Omicron. I travelled extensively last month and most malls and other places of tourist interest were literally empty. So the feedback we are getting on the ground is that January has been very soft and we will have to keep that also in mind that we saw a reasonably good quarter as far as the December quarter is concerned. But having said that, a lot of it is already priced in. Also if you bifurcate the earnings, you will see that many of the companies are facing EBITDA margin pressure because of the way commodity prices have moved.

The surprises to a large extent have also come from the financial space where we believe that the provisioning numbers over the next 18 months would significantly come down and private sector banks and PSUs in particular will significantly benefit and their earnings numbers will look very strong. Commodity is the other segment. Obviously, the way commodity prices have moved has shown a very strong earnings trajectory and it has been a mixed bag. On an overall basis we have done well but there have been a lot of misses in between because of the commodity prices and the cost pressures that companies are seeing in particular.