Julius Baer’s Nitin Raheja on why he prefers to play tech via IT largecaps

“Cement companies will probably land up doing better in this quarter vis-à-vis the preceding quarter. On the building material side, we specifically like structural stories and steel companies. Whether it is ceramic and home interior companies, they are quasi B2C plays and some of them are very strong brands out there in the retail market. Those are the spaces that we like more than cement,” says Nitin Raheja, Executive Director, Head – Discretionary Equities, Julius Baer Wealth Advisors.



How are you looking at the IT basket given that the traditional companies have already declared their numbers? There has been a stark difference in the way some of these new age tech companies have performed vis-à-vis the traditional IT companies. What is your advice to the people who put their money in the recent IPOs of PolicyBazaar, Nykaa, Paytm and the like?
From a technology perspective, we like the space. We think that the technology services companies are in the midst of a cycle which I have not seen in the last 20 years post the technology bust that we had seen earlier. This is going to continue for the next few years. We are more biased towards the larger cap names out here because we clearly see that the growth value equation stands out far better vis-à-vis the midcap names which were trading at substantial higher valuations and have now seen a shrinkage as far as the multiples.

Coming to the new age companies that have just recently got listed, we have seen a sharp contraction as far as their valuations are concerned in the last 1-2 months. It is not very surprising. If one were to go back in history and look at the era around 1999-2000 when we had the last dotcom boom, when we saw a tightening of the Fed rate and liquidity and a lot of business models came into question. Companies which hitherto were riding a virtuous liquidity cycle and access to capital through private equity and venture capital without really having to focus on cash flows, will now have to relook at the business models. That will mean a couple of things; one is either some of them will have to change their business models dramatically or they will have to substantially slow down their cash burn which could mean a slowdown in their growth numbers.

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Further having gone public, they have now come into public eye, which is much more unforgiving – whether it is corporate governance norms or norms with regard to cash flow profitability and so and so forth. Some of these companies will emerge but it is very early to say in terms of how they will have to evolve and change their business model and which of these will fall by the wayside. Right now, we prefer to play this whole technology space through largecap IT companies.

The more vulnerable part of the market is the small cap index. The big changes that you are seeing in the global macro environment would not impact the Tatas, Reliance, Adonis. Do you think the midcap ones are the one to focus on?
Basically any company whose cash flows are weak or which has been mismanaged and sitting on large leverage, in a changed environment of interest rates moving up, these kinds of businesses get impacted. But since the mid and large and smallcap companies – which are aspiring to become far larger and are growing at a faster pace – normally have these attributes and a lot of them are growing very aggressively. At the same time they also require more and more capital to grow. So these businesses get impacted and that is where one sees maximum volatility.

Normally in these cycles, the earnings of this space get more impacted. Of course, there are certain midcaps and smallcaps which are great businesses and who will do well even in such an environment and will continue to deliver. But even there, we will see collateral damage at least for a short period of time of broader volatility.

Normally what happens in such markets is when people are losing money in one particular area, they go and sell some other stocks where they are making money to compensate for that. So, there is an overall increase in volatility. Also since liquidity also tends to be a little bit lower as far as this space is concerned, one sees enhanced volatility happening in such events.

Where do you stand in terms of the cement sector and do you have a pecking order?
Cement is obviously bearing the brunt of high crude prices and freight is also a very important component. High crude prices have an indirect impact as far as freight rates are concerned. In the last quarter, results of all the cement companies came up with the inflation impact showing up. Crude and oil and gas have continued to remain firm. So, the cost pressure remains. However, there has been a better price increase since then and this is also expected to be a peak demand quarter.

Cement companies will probably land up doing better in this quarter vis-à-vis the preceding quarter. On the building material side, we specifically like structural stories and steel companies. Whether it is ceramic and home interior companies, they are quasi B2C plays and some of them are very strong brands out there in the retail market. Those are the spaces that we like more than cement.