Nilesh Doshi on why he sees market in a consolidation phase for next couple of months

We believe in looking out for ideas, stocks, companies or businesses which have some differentiation along with revenue and earnings growth both coming in the near term i.e. in the next six months to one year.

We also look for the change in ROCE, we pick the stock if the second derivative of ROCE looks positive.

Also, we are good at looking for broader trends in sectors. For example, we were talking about capital goods two years ago and we have seen very good results coming out of that industry. In spite of the market marking us now at 10-12% from 18% earlier, most of the capital goods stocks have made new highs.

Along with this approach we ensure that we have a good margin of safety at the entry point so that our risk reward is favourable. The risk, we try to ensure, is more in terms of the time scale rather than the fundamental risks. So, this is how we select our companies.

How are you analysing the risk reward right now for the Indian markets which was triggered by correction last year following sharp run-up in midcap and smallcap stocks? This was further accentuated by war and inflation. What do you think started that and are the triggers reversing permanently now?

Nifty has corrected 10-12 percent but the erosion in stock prices in many sectors have been around 30-50-60 per cent.

According to you, this erosion has taken place during COVID as work from home extremely pent up demand followed by over ordering, over inventorying and a massive supply chain mismanagement which resulted in commodity price hike.

We saw this price correction because consumers over purchased and now there is a huge amount of over inventory sitting at the channel partners and retailers. We look at the US specially because it is a large market and most of the stocks and sectors in which corrections were seen are export led. So we believe that this process of inventory correction may take about next five to six months.

There is metal and commodity price inflation and the prices have softened by 30-40 per cent. Passing on these prices into the product has a lag of five to six months. Finally, the central bankers, government and everybody is addressing the issue of inflation. so we believe it will take another couple of months and thereafter we would expect that things would turn positive. Till then, yes, we can be in a consolidation phase.

Coming to the capital goods sector, L&T Engineering came out with good numbers and they did not change their order inflow guidance, retaining it at 12-15%. Their 30% orders are overseas and they did not soften the guidance. Even Schaeffler, SKF, Ball Bearing and a lot of mid-sized engineering companies had good results. Can you tell us the way you are playing the capital good journey?

Yes, we have some of these names. Also the way we are playing is that with a couple of developments unfolding in and outside India we are seeing a lot of infrastructure capex from the government. We expect PLI led capex happening in the country in 2023.

We have seen the volatility in the commodity price which has cooled off and now there is some stability, hurting most of these companies’ margins in the past few quarters.

Also, we believe that there would be a reversal of a long globalisation cycle. Some e-globalisation is seen in areas like energy and food dependence and oil and gas. So when we put all this into healthcare, pharmaceutical we believe it will help the capital goods companies.