Dhananjay Singh is gung ho on auto ancillaries & selective in capital goods. Here’s why

There are not many discordants out there. I think it is in sync with what is happening across the auto sector. We have had the benefit of improved volume growth from OEM’s standpoint, especially for the commercial vehicle space, which had seen considerable contraction and our view had been that commodity prices, especially metals and all will come off. We have seen that happening. So that area of the market is undergoing some correction and there is a positive spillover effect for downstream companies. Within that, the auto sector stands out in terms of gainers. That is definitely there.

Third part is that the auto sector is also seeing improvement as far as semiconductors supply etc is concerned. All those things are having a positive bearing on the auto sector.

Generally, over the last two months or so, the market momentum has been good and there has been an add on sort of sentimental impact from a broader market standpoint as well for the auto space.

We have seen both the domestic and global investors seeing interest out here. Net-net, all kinds of positivity has been feeding into the auto sector.

Credit Suisse saying that they have downgraded the stock to an underperform rating from neutral and that is largely on the back of elevated multiples. Given that the downside risk can originate from the weak global economic cycle that is going to be a key concern, any views on ABB or some of the other counters within the space?

The broader assessment for the capital goods sector where ABB falls is that there has been good traction as far as overall price realisation is concerned. A lot of these segments have gained from higher commodity prices and better realisations from exports as well as domestic markets.

In the domestic market, we have seen certain traction as far as consumables are concerned. Since the pandemic lows, this sector has been doing fairly well. ABB has done very well and many other names in this segment, companies that feed into the plant and machinery sector on the export side in particular have actually benefited. But I would tend to agree with the view that there is a downside risk out if commodity prices come off globally because of concerns on the global economy.

Various projections show that the world economy would actually halve in terms of growth over 2021. In 2021, there was about 5.8% growth in terms of GDP. It is expected to be lower than half, about 2.7% and subsequently going down to about 1.5% in 2023. So of these global trades, especially from India’s standpoint, many of the capital goods companies who have benefited from better trade and global growth will be impacted both by way of volume growth and by way of realisations.

One has to be fairly selective out there and hence our focus out here is more on domestic plays, companies which are feeding into domestic, defence plays etc and those appear to be more resilient than others. I am circumspect and select also given the fact that the valuations are fairly expensive at this juncture.

Some of these penny stocks are actually gaining traction. In last 10 days, has shot up 62%, is up 40%, Relcom is up 30%, up 25%, up 24%. Is there reason to worry because typically when penny stocks start moving up, that is kind of an indication of exuberance in the market?

If we look at the previous peak which was somewhere around November, December or maybe January, some of these smallcaps actually corrected quite a bit and we have seen capital goods, banking, real estate, industrials all of them corrected quite a bit. Those things happened because of global factors such as tightening liquidity and that permeating into domestic tightness as well. During such periods, the less liquid names get hammered quite a bit and there can be significant correction. So what is happening now is that we have had a sort of rebound since the middle of June and all these sectors are rebounding from the lows.

What is the outlook on some of those Adani Group stocks because they have scaled up in an of their own?

We do not cover any of these Adani companies but my sense is that there is a valuation concern. These stocks have run up quite a bit and so there are valuation concerns in this area.

Coming new-age tech companies, as the tide is turning for a lot of these companies as they start looking at profitability a lot more seriously, would you bet on any of these names?

The focus on earnings is going to be far more acute going forward given the fact that the risk-free rates are rising and if they continue to be so over the foreseeable future, the new-age companies which are valued more on future cash flow, etc, can be under scrutiny and there will be downside risk in such names.

Where do you stand when it comes to IT stocks?

We have been underweight on IT though I like this sector. There have been issues around valuation. We have seen valuations de-rating over the past six months. Last year, IT and metal were the two most best performing sectors. This year, it has been a laggard. Valuations have come off but are still not equal to the pre-Covid averages.

There is still 10-15% higher valuation there notwithstanding the corrections that the sector has actually seen. In the recent rally, the IT stocks have not really participated as much because the local domestic interest in IT companies has been lagging. So, notwithstanding the fact that there was a revival in FII flows over the last one-and-a-half months, it has not really transpired into that kind of buoyancy in IT space compared to other cyclical spaces such as capital goods, banking, industrials, real estate, etc.

It does appear that there is a lack of local participation as well. I think people are bothered about a global recession.