What has been the response to your virtual conference yesterday?
This is a two-part conference. This is a series of two of what we are calling digital access. We have about 45 companies worth about $300 billion in market cap, about 350 funds and about 1300 meetings. Our last conference towards the end of May or the early part of June had 21 companies with about $250 billion of market cap and 650 meetings.
Today our focus has been on some of the large and midcaps where the company stands today and how they are looking at this environment and their plans over the next 18 months is something that everyone wants to understand. We are seeing a most phenomenal response.
What is the focus or the theme around which people will cope up with this lockdown? How will they restart and emerge stronger? Is that the main thing that investors are looking for?
The focus is really to understand where these companies stand today, what they are doing, how much of a disruption has happened during Covid and how they intend to deal with the Covid scenario, if they are planning to raise capital, if they are looking at acquisitions, where they are on the cash flow position etc.
We have some companies that have a great exposure to the rural markets, Their bounce-back has been much sharper and therefore it is just a broad understanding if people are also looking at this bottom up to try and get a sense of where the ultimate demand will be and how GDP would play out over time as well.
What do you make of the recent recovery that one has seen in global markets? What is your view on the block deals that we are seeing and the sort of response that probably a Kotak, a Bharti or some of these large quality names got?
Very clearly, global liquidity is pushing the markets up and this is not only happening in India alone, it is happening globally. About Rs 40,000 odd crore have come into the Indian markets both form the FIIs and DIIs. The Rs 8,100-odd crore SIPs have continued. During and post the SBI cards IPO, we saw a great build up in new Demat accounts and retail accounts and we are seeing that continue. It is obvious that liquidity from all corners is flowing into the markets and as that liquidity remains without conviction in terms of where the economy and the GDP will grow, it is clear that people do not know how the post-COVID scenario will emerge. What is very clear is that the big will become bigger. Therefore, there is an opportunity when some of these large companies are coming in to raise capital. They will definitely be around and will only grow stronger in a post COVID environment.
So, any large company looking to raise funds either to fund their next six to nine months (working capital), growth needs or looking opportunistically at acquisitions — this is the best time as there is a clear dislocation between the markets and the economy.
On Q4FY20 numbers or probably FY21 numbers, when you are engaging with your clients — especially FIIs, big DIIs or big long only funds — what sense do you get? Do you think people have written off FY21 numbers? Maybe, it is a Rs 10-crore loss or a Rs 50-crore loss but is the focus is on the core value of the business and the rebound that can happen in FY22?
Absolutely. FY21 for most is seen as a washout. I do not think anyone is kidding himself about that. What they are looking at is FY22 and how sharp can the bounce back be in FY22. If we draw out scenarios of how things could come back, most people here expect that there will be a second wave and therefore the stop-start, stop-start of the economy is a high possibility. The focus therefore is on moving towards the largecaps and the more liquid names. But yes, the general belief and the understanding is that FY22 will probably be back to FY20 levels for most companies and the small and midcaps will find it far more difficult if there is not a sustained economic recovery. Their earnings will be far more volatile and therefore focus is on the large liquid names which could see FY22 being equal to or better than what FY20 numbers were.
Most of the financials — big or small — are looking to raise money. Do you think this year, large banks, small and mid-sized banks will all need to raise money in the near term?
It looks like most participants in the market including the corporates and the banks are. It is difficult for them to fathom at this point how big this issue could be and therefore you cannot blame the financials for wanting to create a warchest. But when they go into something where the economy actually starts playing out, they start seeing bankruptcies coming in or bad books building up.
They should have the capital to tie through that. So yes, I would expect that most financials would be ready and willing to raise capital at these times. I do believe that you will see a positive surprise in the financials in terms of the lower moratorium numbers, especially in the private banks. You can anecdotally check with all of the corporates. We are seeing that the banks have not been as willing to extend the second moratorium to most corporates, unless it is a Covid related moratorium that is being sought. Therefore the expectation is very clear that the moratorium numbers for most private banks will be significantly lower than what we saw post the first quarter.
Let us talk about consumption. Credit card spending seems to be back to pre-Covid levels. Do you get a sense that consumption may not last for long or the trend may continue to be the way it was before Covid?
The only question here is on leverage consumption. There is a lot of pent up demand that will come through and which will give us a false sense of return of consumption in the near term. What is more important to see is how the leverage consumption comes back. We need to segregate the rural and the urban economy here. Rural clearly is seeing a significantly faster bounceback. The government is giving MSP support. The MNREGA funds are going in. Local retail buying that is coming in there. Most estimates and most numbers that we are seeing and our own understanding of what is happening there is that the urban demand is coming back in patches and it is definitely slower than the rural demand pick up.
What will be your top pick? Which are the sectors where you would be bullish and what are the trends that you would watch out there?
While I do not want to talk about individual stocks, we believe that this is a liquidity driven rally. Liquidity driven rallies have abrupt ends and we are cognisant of that and which is why we remain defensive in our strategy. We like the pharma space, we continue to like some large private banks. We were excited about the chemical space. We are basically saying this has got to be a bottom up approach, there is not one size fits all.
At the other side of this liquidity deluge, you do not want to be left holding companies that do not have the fundamental backing and therefore while it seems like a big party at this point, you need to do your work. This is a tough time to be a fund manager, fundamentals are not stacking up but the liquidity is pushing stock prices up. But I would stick with large high quality names as a preference and you can do a little bit of stock picking and going into midcaps just for that little bit of alpha, but largely I would stay 80-20 in the large caps only.
But again the point about large cap versus midcaps. In all crises, large caps emerge much better and stronger, the ones that survive. Do you think this time around it will be no different?
Yes, the underlying principle for the midcaps is always that you need a sustained economic recovery. Otherwise, some of the midcaps and the SMEs will actually face an existential crisis. Which is why we like the large four or five large private banks. We like the large companies because we are very clear that there will be no consolidation. These are the companies that will get bigger on the other side of the COVID issue. Whether they do this through consolidation and opportunistically going and acquiring smaller companies that are seeing the pain today is yet to be seen. But no doubt, the larger will get larger. A sustained economic recovery or a sustained GDP growth is still some time away and you could very well see a W-shaped recovery coming through.
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