Despite the benchmark equity indices hitting fresh all-time highs, pockets of disappointment are expected to emerge in this quarter and can potentially serve as triggers that may not be favoured by the market, according to Dinshaw Irani, chief executive officer of Helios Capital Asset Management (India) Pvt.
Irani has a cautious outlook for the short-term, though he retains a constructive outlook for the long-term.
It is expected that there will be a few bumps along the way, Irani told NDTV Profit's Niraj Shah in an interview.
The benchmark indices surged to a fresh record closing level on Monday as the NSE Nifty 50 closed 0.68% higher and the S&P BSE Sensex ended 0.67% up. The market cap of BSE-listed firms also crossed the Rs 400 lakh crore mark, and the Bank Nifty also recorded the highest closing level of 48,581.7.
Financial Services Vs Information Technology
It was only a matter of time before the strong financial franchise began to make significant impact. Now, things are in place and the growth was surprising, Irani said. "We continue to maintain a bullish outlook on the financial services sector and remain invested."
For information technology, Helios Capital prefers to wait for the numbers to indicate performance and is cautious. It is evident that progress is underway, and momentum is expected to pick-up in the second half of this calendar year, according to Irani.
"We have maintained a bullish stance on platform companies. We have faith in Paytm and firmly believe in the platform it has created," Irani said.
Watch The Interview Here
Edited Excerpts From The Interview:
It seems the market is not seeing too many miss-ups. Almost every wall of worry is being climbed but you guys have been constructive. Do you continue to remain constructive? Is it paying off thus far?
Dinshaw Irani: Actually, look at the medium and long term. I mean, obviously, nothing can be parallel to what's going to happen to India. Probably you can draw a parallel from what happened in China in the early 2000s till the 2018-2019s.
I think, that's what India is going to go through because I mean, we are looking at the economy growing, we are probably going to be adding probably a fifth or fourth to the delta of GDP growth every year in the next five years as such. So obviously, it's going to be an exciting time going forward and becoming the third largest economy and stuff like that.
But in the immediate short term, we are a bit more cautious than what we were earlier though we remain constructive on the market. In the immediate short term, I think that there will be quite a few bumps along the way which we need to overtake before we get totally bullish. So I leave it here.
What is the mental model while putting in money to work? On the valuation argument it is to an extent expensive. So, do you look at past instances of other economies to tell yourself that earnings growth will make up for this?
Dinshaw Irani: It's not only valuations. Valuations can remain stretched for a long time, but they need some negative triggers to correct. And we believe that starting from the March quarter, the numbers may not be that exciting.
I mean our feel is though you saw what Voltas gave out and it's put the whole AC market on fire as such, but our feel is it's more of a push towards inventories being held by the distribution chain rather than actual upticks happening, because North wasn't that exciting in terms of AC.
But anyway, putting that aside, the fact is that there have been pockets of disappointment in this quarter and obviously that will be one trigger that probably the market may not like as such, given that the last six quarters prior to the March quarter, one has seen only upgrades happening, earnings of the Nifty and various companies.
Our feel is, this time around, the disappointment-to-surprise ratio will be more of an even-steven rather than in favour of surprise. So that may be a dampener.
Then comes the elections, right around the corner now. Obviously, a lot of rumours will fly around that time. So markets will be fairly volatile and choppy.
And then comes your budget. Again, the budget will be again, quite a few rumours flying around already about the budget and obviously there are good things and bad things being heard. So the markets again will be choppy.
And the last one would be, I think, interest rates. Our belief is that the market has jumped the gun on that. We do not believe the interest rates will be so easily cut this time around. I mean, obviously the trigger will be the Fed. The Fed will have to lead the cut on interest rates as such, because other economies are just about trying to manage the currency vis-a-vis the dollar and so was the case with India and looking at what's happening in the US, the service inflation is a problem there definitely. So it's obvious that the Fed will not be too keen on cutting at a real fast pace.
So one has to wait out these small bumps along and one more thing I would like to highlight today. There was this news about two top guys of two companies quitting and the stocks are up. I mean, one stock is phenomenally up. The other one is not up, but is down. Imagine the top guys quit, at the turn of the quarter. Obviously, there's been a problem with the quarter. That's why he's quit. Why should that stock be up?
I am not talking about Bandhan Bank (that) you were flashing just now. I am talking about the other guy. So I'll just leave it here. Obviously as you said the market is climbing all walls of worries and some of them are irrational, I suppose.
How do you dissect consumer services? The numbers from Voltas are very strong. We've seen that traction hump in Symphony. Other discretionary plays—watches, cars, etc, did well. The commentary from staples, may be better than anticipated Dinshaw, but not quite up there.
So how do you straddle the two ends of the barbell? Do you keep overweight on what's worked thus far, or do you go for staples which are probably better relative to their past valuations?
Dinshaw Irani: I think the biggest red flag was given out in the last quarter itself.
I mean, if you guys remember, the top line growth wasn't that exciting. It was mainly the margin expansion, which really aided the growth in profits and that set us wondering.
In fact if I go back to that quarter, the end of season sales started in December itself for that quarter. It's obvious that things were not looking that perky in the consumption space and that's why the US had started far earlier, probably like 3–4 weeks earlier… So there was an inventory build up already happening. So that set us off and we started becoming slightly more cautious.
As you rightly mentioned, I think discretionary is a space that you want to be cautious on. Staples, probably I mean with a mid single digit. Most of the guys who have reported thus far are either low single digits or mid single digit. I am talking about domestic growth. Some of them are also international exposure. But looking at the domestic growth prospects is not that exciting to command P/Es 50 and 60 times forward earnings. So we are more cautious out there overall in the domestic space itself.
We are fairly cautious and are looking only at the luxury part of that space. So, high-end cars and stuff like that is what we're looking at and that's why we are being fairly okay in that space. As I said, quite a few hiccups to go across and probably wait for them to pan out before looking at that space once again very constructively.
So this 10.9% weightage in consumer services for the flexi-cap fund at least, is centred around what part of consumption therefore?
Dinshaw Irani: So, basically we are talking about some QSRs, we are talking about luxury spends. We are talking about some, but QSR we are not bullish on right now, maybe just holding on to what we have and obviously a lot of stocks in tourism and leisure. So that's what we have.
Within healthcare—where you have 9.5% weightage if I'm not wrong as per the last release—what facets interest you? That space is starting to perk up a little bit now.
Dinshaw Irani: So good you asked that question. We have this lovely model for rather rejecting stocks. It's called elimination investing.
What happens in that is that whatever comes out of the funnel, is what our manager is obviously going to look at. So, of late, by the way the two factors, the eight factor rejections which go through. The last two factors are the ones which really gives the freshness of the portfolio. One of them is medium-term triggers and the last one is valuations. So on that basis, quite a few healthcare stock started coming out of the funnel as such. That's when we realised something's changed here.
Obviously the change was, what was happening in the US because the pressure that these fellows were facing earlier in terms of the pricing and all that had gone away a bit and the inventory destocking has come to such a critical level that there was restocking happening. So, obviously the growth rates are looking very exciting.
So, we are mainly now looking at only the domestic plays, which have always been bullish because as I said, if the economy is growing, healthcare spending will grow. And obviously, now even the US-focused pharma companies are coming into the portfolio in a way for us. I think that explains why our healthcare has moved off and the weightage has moved up.
Sorry if I missed it, but what facets of healthcare are you changing the tack on—maybe API, CDMOs, etc? Are you sticking to what's worked thus far?
Dinshaw Irani: So, we were very keen on domestic pharma companies and that remains in the portfolio. That weight remains. But we also are getting more bullish on the CDMO space, the API space and obviously the generic filing space in the US and stuff like that. So that's where we are getting bullish on.
A big upgrade for Info Edge from Citi, which has set a target price of Rs 6,650, roughly 17–18% upside from the current levels, as the recruitment business is finally showing some growth.
Some tech businesses believed that IT hiring is going to be very, very tepid and nobody anticipated anything. Suddenly, Infosys comes up and same for Paytm. I think some of the others seem to have gotten their act—in execution and otherwise—right. Are they now starting to see the benefits?
Dinshaw Irani: Basically, the stocks that you mentioned are mainly the platform guys.
I mean, in fact, we've been quite bullish on all these platform companies. They may be classified as IT but actually they are really platform providers. I mean, in terms of fintech or in terms of employment, in terms of revenues and stuff. I mean, I am talking about these things and obviously delivery and hyper delivery, hyper local food delivery and stuff like that. So these are the companies that we've always been bullish on.
So, we never were fairly worried about their potential in their domestic-focused companies. They're providing solutions here. The employment-generation company—I'm talking about and you mentioned—enjoys basically 7% growth YoY. It is not exciting enough for those kinds of valuations.
I think, valuations are coming mainly because of the way Zomato has moved up and some parts are building up quite a bit of value there.
But one more thing. Info Edge, if I remember right, bulk of their recruiting business used to be for IT companies and if I remember right, it was almost 50% plus at that point in time, which got reduced to an extent.
I mean, if I read what the IT guys are telling the press, it's obvious that they're trying to load up on employees right now and they're keeping their databases live. So that, in case there's a bump-up in the spends, they can start recruiting people, but it's not really classified to action today.
So maybe that is what is playing out in Info Edge apart from anything else. However, the few companies we just mentioned were bullish on the hyperlocal delivery part of the business.
The ones who have not quite got it right because of various reasons, Paytm, etc, case in point that you guys weren't bullish at a point of time, better to weed out the losers and move on to something or would you keep the faith?
Dinshaw Irani: We are keeping the faith with Paytm. We haven't added to the name. The reduction that you saw in the weight was mainly because of the price correction rather than proactively cutting weight as such.
We wanted to initially, but the way that savage move happened downwards, we realised that there's no sense now selling out the stock. We have fair believers in these kinds of platforms Paytm has created. And frankly, we would rather wait for the sound bites to clear out before taking a very constructive view on that particular stock. Right now, it is too fluid for us to even take a call on that stock.
The other piece is your belief in financials. You woud be happy with the quarterly updates thus far. The larger ones like HDFC Bank have come up with pretty decent updates. Do you think this is the start of something meaningful in terms of business growth?
Dinshaw Irani: I think so too. In fact, if you remember, in our last few interviews that we had, we were very clear that it's a matter of time before strong franchisees start kicking in on a big way.
Obviously, HDFC Bank had its own hiccups. Initially, it started with the change at the top and then the ban by RBI on the credit cards. And then, obviously the platform issues that they were having in terms of the technology platform. And then, the last one was the merger which happened, which obviously took a while to standardise, I mean get to digest rather.
So it's obvious that now things are in place there and the way that growth happened also took us by surprise. But we weren't expecting such a huge kind of deposit growth, but one can really appreciate the kind of franchise that the bank is in and obviously, if you see the other private sector banks also which are reporting numbers, it's pretty obvious that there's been a definite growth in terms of deposits for all, but the way it grew up, it was a phenomenal one for us.
We continue to be bullish on that sector. We continue being bullish on strong franchises. In fact, even in the PSU space we have a few which we would call strong franchising, and we continue to remain invested.
Are Naukri’s billings, which are up 7%, an indication that IT companies might be hiring? As of now, it doesn't seem. Accenture numbers lay out that there is nothing happening on the anvil. But if indeed Indian companies’ hiring numbers pick up, is that a precursor to positive times or you would wait for some time?
Dinshaw Irani: I would rather wait for the numbers to really figure out. As I said that I think the numbers which actually were not hiring but mainly the revenues of Info Edge, which doesn’t justify the hiring.
You can apply, you can refresh your databases... It's obvious that things are moving there and I think it's all in hope that things will pick up probably in the second half of this calendar year. But frankly, I mean, whatever sound bites you heard or whatever calls that we've done, we're not seeing too much of bullishness in that segment.
And as I said, the top guy in one of the big IT firms quitting at the fag end or rather the beginning of a new quarter, obviously the last quarter, wasn't that great and that's why he was asked to leave, I suppose. I'm just speculating here. I don't know what really transpired but that's the feel that one gets.
But the fact is that obviously if the quarter was good, he would have continued to stay on. So obviously there's some problem in this quarter. It's not that simple a run for IT as such.
And obviously, I mean, if the US is looking at probably interest rates getting postponed, that story again dies out on the discretionary spending kicking in which are really the margin movers for IT companies. So it's obvious that things may not pan out as I think everybody expects. So we'd rather be cautious today and stay away from that sector.
So one more caveat, I would like to give out. Whatever negatives we talked about probably will be short in our advisory portfolio and wherever we are positive we will be long in our portfolios.
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