DEEPAK JASANI, head of retail research at HDFC Securities tells Saloni Goel in an interview that instead of falling for the name trap, investors must look for individual stocks whose prices are yet to reflect their growth potential fully. Edited excerpts:
The debate between growth and value stocks has rekindled. Which side are you leaning?
Value stocks generally come back in favour when the economy or corporate revenue/profit growth slows down, while growth stocks remain in favour when the risk appetite globally is high. Hence, the fund flows into these stocks increase leading to their rerating. At times, however, both of these are in demand. This happens especially when the economy is rebounding from the low levels.
Currently, value stocks have made a comeback but even the growth stocks continue to do well. Choosing one over the other at this point may not be easy as whenever the markets start a deeper correction, both of them could react, although growth stocks could fall a little more. Rather than going by either of these, it may be better to look out for individual stocks whose prices are yet to reflect their growth potential fully.
Do you see value in information technology (IT), pharma, FMCG, specialty chemicals sectors now?
Specialty chemicals still seem to be in favour due to the multiyear opportunity seen there. IT, Pharma and FMCG — the traditional defensives — are valued fairly and have not reacted much even as the focus shifted to growth stocks. The growth potential in these sectors, especially select IT and pharma stocks, remains high. We could still see some of them doing well going forward.
What in your view are the key risks to market rally at this juncture?
The key risks to the market rally include global interest rates inching up, central banks reversing their easy money policy, inflation globally and locally remaining high due to commodity price up move, supply chains still not coming back to normal, monsoons in India may not be normal and if the fiscal situation in India does not show improvement over the next few months.
There is very little that investors can do to hedge against these risks. Sticking to their asset allocation plans (and hence cutting back equity exposure, if it has crossed the desired levels) is one practical way to safeguard themselves, although this may mean that they may lose out on any further up move in the markets. Also, they may be careful in subscribing to the initial public offers (IPOs) and buying momentum stocks from the markets. Buying insurance in the F&O markets may be a double-edged sword.
Retail investors have dumped equity MFs in favour of direct equity. How wise is this given its difficult for markets to replicate the same returns as they posted since March last year?
Retail investors had time on their hand during lockdown to dabble in direct equities and have so far made money. Mid- and small-cap stocks have provided very good returns over the past year or so. Mutual funds have disappointed in terms of returns over the past few years (barring in the last two quarters). Very few mutual funds have provided alpha to their investors due to the lopsided behaviour of the markets and the inability of the fund managers to respond to the changing landscape. Despite their shortcomings, it may be unwise to abandon the mutual fund route completely. If the investor does not have the time or skill in picking stocks and holding them for the right time, then mutual funds still offer a good way to participate in equity markets.
Investors can also put a large portion of their funds into mutual funds and with the balance money, they can keep dabbling in stocks directly. They need to develop money management skills and exit strategies as in every correction they are the ones left holding the baby for the next few years.
What do you think is the best way to play the infrastructure theme?
Material stocks – i.e. steel and cement are the easiest way to participate in the infra theme. The infra sector faces the challenge of unexpected regulatory changes, competition and availability or cost of funds. Taking a direct bet on infra stocks could land the investor into trouble if any of these go unfavourable to his set of stocks.
What’s your take on the sectors that have been worst hit by the Covid-19 pandemic such as hospitality, multiplex, aviation sector?
Some of these sectors have seen a structural shift in their models. During the lockdown, consumers have adapted to the new normal and taken to doing things online. Hence multiplex, retail, aviation and such other sectors need to adjust their business models to this reality. These sectors may not go out of fashion, but they can still be looked at if the valuations become better from a buyer’s perspective.
The recovery in vehicle sales has helped investors mint money on the back of the auto story. Can we expect this trend to continue or can rising fuel prices cut short this rally?
The need for personal mobility in Covid times has resurrected the auto industry from a low growth phase. This can continue for a couple of more quarters. However, the sector is cyclical and hence one will have to be careful of entry-level valuations. A large population of CNG vehicles and the increasing popularity of electric vehicles have to some extent blunted the effect of high fuel costs in times when people tend to avoid travelling in public transport. Also, expectations of relief in taxes on fuels could keep hopes of auto buyers alive.
What would you attribute behind the recent euphoria in IPO mart?
The large liquidity sloshing around and the listing gains of past IPOs are the key reasons for the IPO market doing well. Also in these disruptive times, investors are hopeful that new players would be more capable of adapting to changing times compared to the already listed players, and this assumption may not always be right. Also the fact that there is no existing float available in these IPOs, some of which may be in niche areas also helps build the hype. The grey market, which has become highly active, has also contributed to the IPO boom. Investors should, however, be careful in getting carried away; although a reversal of IPO frenzy this time is taking longer than in the past.
What are your checklists before investing in an IPO and in what way are they different from picking a stock?
Some of the points to be checked while evaluating an IPO includes the type of industry the company is in (whether cyclical, commodity, defensive, new age etc.), the consistency in past growth of revenues and profits and its distribution policies, the other businesses of the promoters and their involvement in them, the uniqueness in the products/services sold, any technology edge due to own technology or borrowed from outside, the leverage ratio of the company, efficiency of working capital, the use of issue proceeds and the timing of their intended benefit, the promoters compliance record in the past, the competition scenario in the industry, the growth phase of the industry, the valuation of shares as compared to its peers. Most of these parameters are also seen while picking a stock from the secondary market. The main difference is that in an IPO, limited data is available on financials and on promoters’ past behaviour.