The key highlight of this week was the numbers that we got from TCS. What is your take on the entire IT pack? Nifty IT is down about 3% and the midcap IT stocks have definitely taken it on the chin?
Yes, there are three big issues with IT; one is the attrition numbers which have been high even though TCS hired 36,000 this quarter but at a 17% attrition, the market is very worried that if such a high turnover is happening with a top company, it is anybody’s guess what is happening on midcap IT.
Second, to block attrition, salary raises will come in and that will lead to margin erosion. So continuation of margins will be difficult.
Third, domestic business and European businesses are looking a little clouded. That is what is happening in IT. Seasonally, this is normally a very weak quarter for IT and so that was as per expectations. TCS numbers were ahead of expectations but the market has decided that IT has outperformed over the last 16 months, it is over owned and now might be a time to let out some steam from IT.
I am still bullish on IT on a one-year, two-year basis. I think it is one of the sectors to own in India along with financials but we might be in for some more bloodletting on the IT index for some time especially on the midcap IT.
This week, the headlines coming from the CPI numbers as well as the IIP data with inflation coming in at a 17-month high level. Not only in India but in the US also we saw high inflation numbers. What does this mean for yields going forward and markets as a whole? Is the Street not pricing enough of the margin as well as volume pressure on account of the commodity prices going up?
This quarter’s numbers are going to be good because the pricing issues of the commodities took some time to really happen. Even in India, it was four-five days after the UP elections that the 80 paisa per day petrol and diesel price hike started. So March is really not reflecting the complete oil picture. April will be worse. Overall, the interest rate cycle is turning after a 40-year downward trend. During 1980 to 2020, US interest rates went down from 20% to 0%. 1980 was the Volcker Shock when overnight Paul Volcker raised the US interest rates to 20% to break the back of inflation and that led to a huge recession leading to Jimmy Carter losing the elections. Ronald Reagan came in with an America First kind of a package.
Exactly a similar situation is happening now on the mirror side. We are going to see multiple years of higher interest rates. There is no other way out, liquidity will have to be reduced as it has reached unsustainable levels. Just to give two examples; in 1980, at the start of the last cycle, there was no country in the world which had more than 300% debt to GDP ratio. Now, there are as many as 25 countries including the US, China and Japan where the total debt to GDP is more than 300%.
So one can say the financial sector versus the real sector, Wall Street versus Main Street in 1980 was 1:1 ratio, today it is 4:1. We are talking of something in the range of $340-350 trillion mark-to-market of stocks, bonds and all financial instruments in the world are at totally unsustainable levels. I think we are in trouble as far as the stock markets go. It will take a year to wind down but ultimately we are going into a recession in the US, which will bring down the global economies and I would be very cautious on stock markets right now.
The opening up theme has been working for the last two, three months. Do you see more upside to these counters or do you think the best has already been priced in?
No, no, there is a huge upside. The summer vacation is coming by and if you look around the traffic, the mobility indicators, the huge lines at the airports, hotel bookings, the way the ARPUs are improving – the reopening trade is really doing very well. I would stick with it. So restaurants, hotels, airports, airlines all are set to do quite well as that consumption part is very much there. People have been couped up at home for two years and we are seeing a huge amount of travel and vacationing happening.
The other thing is a lot of relatives are visiting from abroad on the Easter break. So the reopening trade is very strong and it will sustain. Airlines are looking good despite the high ATF prices. Just sheer volume growth is coming back. The airports are chock-a-block and despite increasing flights, we are seeing a good amount of load factor. All the four flights I took were full, not one seat was empty.
If I had to give you a blank cheque and ask you to invest in some of the counters, which would be your top bets?
I think financials very much, oil and gas and cement. Cement is looking good because coal prices came off a bit and I am expecting a price hike down the line. So cement is looking good. Industrials, defence are looking good. In case of defence, there will be import substitution to the order of $26-28 billion over the next five years. It is a multiple of what these companies are doing right now and the export market is targeted at $5 billion a year at the end of five years.
So it is a good time to get in at the ground level irrespective of where these prices are today. If one can identify the defence beneficiaries both in the private and public sector, it is a good time to get into them.
We have also seen the story of the PLI unleashing a good amount of exports from India. It will happen on the defence side first on import substitution, second on the export side. So a good time to get into the defence sector.
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