There is this disconnect between the real economy and the overall news flow around versus the market, which is just rallying and failing to go down. What is happening and what are you recommending to your clients?
We have to understand there was lockdown 1 to 5 and suddenly the way unlock 1.0 is happening is actually very surprising. It is very fast. People said Q1 and Q2 are gone and in Q3 something will happen. But today people are saying Q2 is looking very good and in Q1, too, something will come up vis-à-vis the expectations. So I think the unlocking is happening very smoothly and strongly. So that is one part of it.
Second, the FII money which is coming is interesting because every day you are seeing Rs 1,000 crore flowing into the market. That is also giving a lot of upside to the market. I think these are the two reasons. Plus, there are pockets of companies which fell significantly. Look at what happened to NBFCs. People said a lot of companies will go bust and the market leaders will also find it difficult to come back. I think all that is changing a bit and that is the reason the market is showing that kind of resilience.
Trust me, the market gives us a lot of time. Except for 7,500 where it moved up quickly to 8000-8500; from there, every 400-500 points market has been waiting and stabilising and then moving up. So the market also gives a lot of time for people to buy and this is what is happening right now. There are a lot of people who are still sitting on the sidelines and have not actually invested. So now they are coming in as compulsory buyers. So all these conditions actually are leading the market to do very strongly.
Did you manage to catch some of the NBFC names in terms of your calls to your key clients because you work very closely with the HNI community which has relatively more risk taking ability? How has your experience been and if you could share some of the names which you have managed to catch successfully in the last massive dip?
I think Chola is one which we actually captured very well. It had fallen to Rs 125 levels and from there on moved up. So the idea was very simple. We said guys like Chola used to do 21% ROE and used to trade at 2.5 to 3 times and currently we are getting at one time. I do not know how much further it can fall but at one time, you have to buy these companies which are very strong on the management side and have very strong business models. And that was the call. Maybe Chola could have gone to Rs 85; I do not know. But you have to buy these companies.
Bajaj also used to trade at 7 times at Rs 1,800; it was closer to 3-3.5 times and they kind of knew what was happening and that is the best part. See if we know there is a problem in a company, then we know the problem and we will work on it and that company generally does very well.
So coming out of banking, chemicals is one sector which we played very well. From PI to Aarti to SRF, all have done very well. Navin Fluorine which is also under our coverage looks very very interesting. In fact these days, channel check was a very powerful tool which you apply and we got to know that cement is also doing very well. They are coming back to normal level at least to 70-80% and on that, we went long on JK and a few more companies. So these things help us a lot and we were actually able to play this rally relatively well.
What are your research guys telling you after speaking to a host of these companies? What kind of operating capacities are they operating at and apart from JK, do you like something?
I will give you what we are thinking on this. One thing we have to know is that in India, the rural sector is doing very well. We know rural is a big portion of our consumption and that is doing exceedingly well, which has kind of helped India a lot.
Second, in cement when we did the channel check, we realised that it is not that bad because people said that construction will stop. These companies will stop the plant or maybe 5-10% capacity utilisation will happen. But actually it did not pan out like that because the demand was coming back very strongly. In May when we were talking to them they said we are already at 70-80% of our normal utilisation which is a very big number because what we were seeing is that they were operating at 5% to 10% and were back to 70-80%.
One more data point which was very interesting for us was demand for power. Power demand was also coming back to 80% and 85% levels which actually is a very powerful tool for us to know that markets are coming back to normalcy level. Factories are coming up and, of course, these are supply side things. I know that the demand side is still to prove but at least one side is getting its act together and that was the reason you had to play these companies. Now JK again is part of the same. Shree Cement is part of the same. Shree Cement actually did grow; not talking about de-growth but they grew by 2% in that month, which is very-very interesting.
How is the leverage right now among big HNIs or big family office accounts which you are working very closely with? I clearly remember a couple of months back, the leverage book of big HNI and family office had become almost zero and we all know three-four companies which actually operate that book. Has that started building some leverage?
I would not go to specifics but generally I would know that leverage is still not there. People for sure are not borrowing capital to put in these markets because we have to understand markets are still very volatile; although they are going up. VIX is still about 30 which again is on the higher side. So people are not adding too much of risk and people are not adding leverage in buying into the market that capital what they have because they are sitting on a lot of cash; so they are just putting that money into markets.
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