What’s ailing tech stocks despite decent Q1 numbers? Chakri Lokapriya answers

ET Now: How quickly the IT rally fizzled out, or maybe it is just today’s move. How are you positioning yourself and are you again buying this dip in IT?

If you look at the numbers, whether it is Tech Mahindra,

, all these companies that have beaten on revenue, the margins have been lower for well-known reasons of wage hike and also there is a subcontracting out. The reason for subcontracting out is that they are unable to find enough people and give out deals to smaller companies.

So, there is a double whammy on the margins but all that is factored in. I think, now the companies are still growing 17-18 per cent.

If you look at Tech Mahindra, it is trading at 16-17 times, so multiple wise, they are not expensive. Right now, the commentary within the US is discussing whether there will be a recession, and this is going to be the quarter of negative economic GDP growth in the US. Therefore, will it percolate down into IT demand that probably holds to an extent to the IT product companies but not to the services companies because they improved productivity and usually see an uptick. So I think IT looks good at this point.

ET Now: Would you buy at the current price? Looks like it wants to breach Rs 40, but that has not happened yet?

If you look at the

story, around the IPO, they said that they were going to breakeven at some point in the future, and now, they made a Blinkit acquisition that has pushed out the breakeven by another two years. So, in an environment of tightening of interest rates resulting in higher interest costs in doing business. Thus, you are pushing out the path of profitability in uncertain times, which is clearly taking a toll on the stock. So, I would not buy the stock even at the current levels because there is inflation, which is hurting their wage cost, their raw material cost and now they are pushing out profitability.

ET Now: A couple of good reactions are coming in as far as earnings are concerned. surprised positively with the margin profile, and look at that stellar volume growth that has reported, one of the best they say in the last six quarters. What have you made of these numbers?

If you look at Bajaj Auto, all the right boxes have been ticked — revenue growth has been strong, there is a margin expansion, and there is growth in Latin America and Asian countries. Also, there is a new electric vehicle launch of Chetak.

All these things lead to higher volumes, and the valuations are on its side. So it looks good as an auto company. Asian Paints, also tells that the high end of the spending is intact, their premium paints business has done better than their low-end paints business, and their overall revenue growth, therefore, translated to be higher than expected.

So, they will benefit from the lower commodity cost, but I still think that their bread and butter business, which is the mid-segment of regular residential painting, whose volumes that have to be picked up. So, I think we will still wait.

ET Now: If you are tracking the Adani Group stocks closely, you would’ve seen that ‘ year-to-date, for example is higher by 50 per cent. You cannot say the same for , which has been moving pretty much sideways through the year and has not been giving that kind of return to the investor community at all. There is also , which is higher by 57% YTD.

Adani Ports has clearly underperformed and partly reflects recovering economic activity in which port volumes have not yet recovered to the levels that they were 2-3 years ago.

So from that perspective, it looks good. I think it has valuation and business momentum. Also, its market share has increased. So, when some of the supply chain pressures ease, I think Adani Ports will be well positioned. On the other hand, Adani Green focuses on green energy, which is clearly the new hot thing in town and will be for quite some time.

The growth curve for green energy and green technology is huge. The whole war is about if there would’ve been green energy, then the supply chain would not have hit because of the Ukraine war. So the shift of the capital that they have committed to this space is humongous, so right from a grid level to electrical vehicle and across the board, there are challenges to overcome, and Adani Green, that way, is extremely well positioned.

ET Now: Would you have any view as far as the entire cement pack is concerned, and is this the right way really to play the real estate theme or is it better to stick with the real estate names?

I think cement is clearly a good way to play the real estate theme.

, Ramco Cement or Dalmia Bharat have corrected a lot due to commodity price pressure, higher raw material costs, lower demand, and the CCI probe. So, I think now they are at an interesting juncture in terms of valuations which are very cheap and volumes which can only increase. For JK Cement, the white putty demand is picking up.

For Ramco Cement, demand in southern states and in Maharashtra is picking up. So, cement names clearly look good because valuation is on their side.

ET Now: So is the case with realty also, of course, the realty revival is now a well-discovered story, but it is no more just about . It is actually even a Macrotech, for instance, we all saw the Q1 update, , all of them are now sort of joining in the ambit of the big movers?
If you look at Oberoi Realty, it looks good simply because if you take away all the noise, the interest rates today are more or less slightly below. They are where they were pre-pandemic, so that did not stop buyers from buying three years ago, so it will not now.

Thus, the rising interest rates are not a concern for real estate, it is just a question of certainty of confidence in themselves. With the economy opening up, of course, lately because of the war, it has led to a stop and start in terms of the markets, but I think the demand will come back because if you look at just about any sector hiring is picking up which is a good sign for real estate demand.

ET Now: I guess when it comes to , the valuations are never a concern?

It does have momentum on its side, and the stocks have been very good. It has positioned itself well within the mall space. The consumer demand across the board has been strong, reflecting in the numbers. The only thing we will see is if there will be some amount of margin pressure.

ET Now: I want to talk about the IT pack because I am really perturbed by the negative reaction we are getting on all the midcap IT. reported an 11 per cent constant currency growth on a sequential basis, we have got guidance upgrades coming in from the likes of , but the Street is not buying that at all. Is this the case or perhaps the momentum and the sentiment around the sector is weak, so investors should just stay away from that?

Because the US sentiment is kind of weak right now, and they are in a very strange situation where inflation is high, demand is low, but they are looking to raise interest rates. In a period where economic growth in the US is actually going negative there is a talk about increasing interest rates and the debate of whether it is 75 bps or 100 bps.

Now against this backdrop, all the tech companies in the US, we are not talking IT services, product companies, their cost of capital was cheaper than they are right now. As rate hikes happened in the US, suddenly their cost of capital has increased. Indian IT companies do not have a problem because they are services companies but being in the same space and catering to the largest market 99 per cent — I mean majority of the revenue comes from the US, which I think is largely an unfounded fear.