We’re Bullish on Pharma, IT, Auto & Private Banks
Companies could spring some surprises in the March quarter led by commodities related, cement and automotive companies, said Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services. In an interview to Rajesh Mascarenhas, Agrawal said he is bullish on IT, pharma, auto, private banks and consumer companies. Edited excerpts:
What’s your assessment of global risk and its impact on India? There are problems related to trade and financial flows. Strengthening of the dollar or yuan devaluation will pose some challenges to us. However, there is a huge liquidity available globally with zero interest rate situations. There is a crisis of yield; there is a crisis of growth. World is running around here and there for the yield. You should be competitive enough to give high quality growth and yield. Why are investors coming to India despite an unstable situation? Because, India is at a last frontier of a big growth with positive yield.
What China has done in last one decade — from a $2 trillion economy to a $12 trillion economy — that opportunity is there in India now.
Will firms see earnings revival in Q4? There will be some surprises this time. My sense is that in many of the companies’ analysts will not get right even though you will not see much difference in aggregate numbers. For instance, oil companies will see inventory profits now as oil has rebounded from $25 to $40 per barrel. Commodity burst that we see in last 7-8 quarters has now bottomed out. I expect some of the commodity related companies, there will a huge swing. Cement sector could also see some revival as cement volumes are good this time. Some of the automotive firms like Hero, Eicher Motors can surprise as the cost was down, while margins were pretty good. Overall there will be some sign of revival expected in the fourth quarter results.
There is a view that market valuations are rich... I am a permanent bullish investor and I always feel bullish. I am not concerned about the bad portion of the economy. As an investor I pick and choose where the opportunities are and I will put money out there. In a bad time, we will get good price and in good times, we get good return.
In a lot of companies, there are fantastic franchises. In any valuations module, there are three components — breakup value, franchise value and growth value. Very few companies are growing rapidly, but you have to balance the opportunity — how much you should pay for the future growth and how much for the franchise. This game is now very calibrated.
What are you buying now? We are buying IT, pharma, auto, private banks, consumer and some selective stocks from other sectors like BPCL, HPCL, Indigo and so on. Making money in the stock market is about a brilliant portfolio and not about a single stock. If you are not speculating and if your portfolio is not leveraged, you will always make money. Smart investors will make higher money and others will make less money, but one will definitely make money. Public sector banks should be avoided currently as lot of mess yet to be cleaned up.
Why are you so bullish on aviation? The biggest economic event in the world, particularly for India, has been the collapse of oil prices. Aviation is one such sector benefited the most out of that as 40% of the their cost is ATF. Today it has come down by 8-10%. If you bring down the fares, I think there would be massive crowd to shift from train to air. In a country like India, only 40-45 airports are ac- tive whereas at least 200 are needed. That’s why enormous opportunity is there in aviation sector where competition is very low.
You remain positive on pharma... Indian generics have no global alternatives for the long term. I see a sign of maturity scaling up among Indian pharma companies. Most of the pharma companies can throw one of the most wonderful opportunities to buy 30-40% cheaper currently if you have faith in the management. Business opportunities are beyond doubt because world needs generics. The issue is how managements are competent to overcome the regulatory hurdles. The current problems are temporary in nature.