Is an anti-ESG trade going around? Should you invest in ITC? Anshul Saigal answers

The week has been full of headlines in terms of the geopolitical action, what is the word coming in from the ECB as well as a lot of sector specific headlines but for the coming week the big cue is really the imminent Fed hike. What do you think is the next trigger for the stock markets, do you think the consolidation phase is over now?
Regarding what is really happening on the geopolitical front and the impact on the markets, there is enough instance in the past of regional wars or even more widespread wars that have played out and people have sold into the fear of war and thereafter we have seen significant rallies as the war has abated.

Even in this case starting October 2021, as we are well aware, FIIs have been sellers in India and the markets became highly volatile. Added to this was the fear of US Fed tightening of liquidity. Our belief is that because of the war, globally currency printing goes up and because there is more currency on the ground, price of assets actually move up in comparison to currency. Even in this instance, the US Fed is not expected to tighten at the same speed that they had anticipated earlier. Both these things taken into consideration, we believe this may not be as bearish a period as the markets or general commentators are indicating it out to be. Our belief is that this event may turn out to be reasonably good for the markets.

Regarding the fact that it is not as bearish as a lot of experts are making it out to be, are you still in the growth camp? A lot of people have started talking about how value is coming back to the forefront.
In the last two, three months, I have attended a number of company calls and one positive factor that I took away from most of these calls is that companies are building for growth. They indicate that there is volume growth going forward even though in the last quarter we did see raw material price pressures leading to gross margins contracting but most companies are indicating that there is tailwind on demand because of which over a period of time, they will pass through these cost increases to the eventual consumer. As a result, our belief is that if volumes continue to track as they are in recent times, markets will take cues from that and that in turn will be positive for the markets.

We are in the camp that growth is picking up unless there is an inordinate increase in monetary tightening. Growth is here to stay and this will be a year of growth. And for that reason, if prices correct and valuations become reasonable in comparison to that growth, then this will be an opportune period to actually build portfolios.

ITC which has not participated in the rally which transpired till about last year end and also has not fallen much in the recent correction as well. Do you believe that ITC proposes any kind of value at this juncture?
Actually what has played out over the last three, four years and in a very pronounced manner is sectors and segments of the markets which comply with ESG requirements of global investors. ITC does not meet those requirements for the obvious reason that it is a tobacco and cigarettes company and for that reason, it has been penalised over this period.

I was seeing just the other day that it used to be nearly 9-10% of the index and it is now just over 2% of the index. In a five-year period that is the amount of de-rating that has played out in this name. What we are also seeing of late is that there is an anti ESG trade playing out. Coal companies, energy companies and even defence companies are doing quite well in an environment where the markets are quite volatile.

Given how the trade is shifting, it is very difficult at these depressed valuations to be bearish on a name like that or even on a sector like that. Given that I would just say that while I do not want to give any forward looking guidance, I would just say that downsides in anti ESG sectors look quite low and this sector also falls in that category.

What about the FMCG business and not just ITC? Post the one month inventory, most of these companies will have no choice but to pass on the commodity hit on to the consumers. What happens then? Is this entire FMCG space an avoid for you now?
The fact is this time when commodity prices have gone up by such a margin, it is very difficult for the consumer to absorb all that price increase in one go. For that reason, these FMCG companies will moderate their price increase over a period of time and so it may take maybe a quarter to two quarters for that price increase to be passed on to the consumer.

The reason these companies are so wanted and followed by the markets is because their brands are such that it is not very difficult for them to over a period of time pass on these cost increases to the consumers and for that reason they trade at the valuations they trade. In fact, many of these companies trade at 45-50 times, even higher on price to earnings. When one sees such contraction in margins over short spans of time, these valuations do not allow for room for error and as a result, these stocks actually consolidate.

But in case they correct meaningfully, then these are fabulous companies which, given the pricing power, should be looked at with interest by the investor community. Near term, I would agree with you that these cost increases will cap upside on these companies but they are fabulous franchises and over a period of time, this should all normalise.

What about real estate because we have heard a lot of experts talk about how we are coming out of the multi-decadal low as far as real estate is concerned. But on the flip side, cement names continue to be under pressure, given the crude spike that we have seen. How would you like to play that theme?
Again there are pressures on costs in that space – steel, cement, other raw materials, logistics all of those are up and so there will be, of course those pressures but the base is so low in that sector because it is coming off a 7-8-year low and the demand tailwind is so large because people have deferred their purchases of real estate, even primary real estate. We anticipate going forward this space is going to see significant tailwinds on demand and like you rightly mentioned it is a multi-year consolidation out of which this sector is coming out.

For that reason, valuations are also not out of whack so valuations are reasonable, volume seemed to have tailwind, even the macro trade seems to be in favour. The macro trade being that because there is so much printing of currency hard assets should be a beneficiary and real estate as a result should be a beneficiary. Given all of that our belief is real estate is a very interesting sector to be looking at for opportunities whether direct or indirect.

Where within banking have you been a buyer if at all in the recent decline or recommended buying into?
Some of the larger well capitalised banks which have corrected and which have given strong guidance for growth and have indicated that their net interest margins have room to expand going forward are the pockets that we have invested in. Those are both in private as well as PSU banking space. We believe the PSU banking space is right for a re-rating and there is significant room to re-rate in that space because the NPA cycle for them has stopped. They have sufficient capital now. They are seeing write backs which is enhancing their capital base.

The room for growth in that space is quite substantial given that if the capex cycle picks up in the economy, then corporate lending actually does pick up and they play a significant role in that cycle. So given all of this we believe that both the private as also the PSU banking space throw up opportunities at this time.