Hello HiteshJi, from several of your responses I read your clear message is find sectors that have the potential to be in favour for next couple of quarters and then identify potential winners that are reasonably valued.
Looking at the macro scenario where locally and globally where people are expecting a slowdown, bond yields low, low inflation, low interest rate, INR continued to be weak against dollar etc I cannot think of many sectors that can be resilient in a low demand environment
I am thinking may be IT, Indian healthcare providers, Pharma (I know you don’t believe this might do well), aquaculture, fine chemicals, and some industries where government spending will increase - water purification, defence equipment etc.
What are your thoughts on the promising sectors for next 1-2 years?
CRAMS seems to be the the sector that seems to have found some favour with the markets. Fundamentally also it seems to be on a strong wicket with these companies gaining due to increased focus of MNC companies on Indian companies for outsourcing.
The better quality companies among the space like divis, syngene and some promising companies like hikal do look interesting.
The good thing about the current market is that it gives enough opportunity to study and then if convinced, accumulate the company in question.
Medical devices consists mainly of polymedicure which seems to be growing sedately.
Hi Hitesh bhai,
How about the IOT and Digital space where the companies like Infoedge, Justdial are rock solid in this falling market. There are some interesting new listings in the space like Indiamart and Affle. All these companies are having negative working capital which may be the need of the hour considering the tight liquidity in the market and they all have very good operating margins. Your thoughts please.
I dont track glenmark as of now. I had a chat with an industry expert recently and his feedback was that the US markets still remain extremely competitive and the fate of a successful USFDA approved molecule depends on how many players are there on the day of launch even if the launch is in exclusivity period.
The better companies keep plugging away and remain prepared to launch and make quick bucks/windfall gains if they get lucky and the competition is limited for whatever reason.
But his view suggested that as of now there is nothing to get unduly excited about US facing pharma companies unless we have incisive insights and the company is a value buy.
In the pharma space, API players seem to well placed due to disruption in Chinese production. Other companies which do not depend on the US markets too much like JB chem, ipca etc seem interesting.
@prabhatg1, i don’t track Johnson hitachi. I tried looking at voltas but did not find too much valuation comfort.
As of now some sectors that seem interesting and showing relative strength in a weak market are hospitals, fmcg, high quality specialty chemicals companies, large cap IT etc.
I dont track the IPOs too closely as I feel in most cases, IPO indicates … its probably overpriced.
Thanks a ton HiteshJi, appreciate you sharing your thoughts, next step should be searching for reasonably valued companies in these spaces
hospitals - aster, apollo seems well placed. HCG is severely beaten up, the fundamentals are improving and capex cycle is coming to an end this year.
fmcg - need to read up
high quality speciality chemical cos - need to read up
large cap IT - TechM seems a reasonably valued pick
Hi Hiteshbhai @hitesh2710
1 Which stocks have great growth oppurtunities amongst these three FMCG stocks ?
Britannia, Marico and Godrej Consumer ? How do they rank against each other in your view in terms of high growth oppurtunities ?
2 whenever auto sector picks up , can one expect Chola to grow faster than Bajaj Finance considering that it has great exposure to auto compared to Bajaj finance which has a more diversified and secular portfolio?
Many thanks
Among britannia, marico or godrej consumer which one will grow faster is a tricky call to make. I think the basket marico has should help it grow faster.
Godrej consumer has a niche in hair colors and insecticides but they will have to create newer more effective products in the insecticide market to get higher sales. Good night liquid is practically useless against mosquitoes. I heard good reviews about fabric rollon from godrej consumer stable to protect against mosquitoes. If it is effective it can have a very large market. They do market it as an organic product devoid of harmful chemicals. They also have launched shampoo based hair dye which makes it very easy for dyeing hair. Need to see how much traction these products provide to the overall portfolio.
But taking a call on which one is going to grow fastest is a tricky question.
Another aspect of the relative strength shown by these companies is that these are perceived as defensives and money tends to move towards safety when markets are going down. Its a first choice for risk off markets. (besides fixed income instruments or debt funds or say gold)
About prospects of Chola vs Bajaj Fin, I think BF would continue to outgrow all peers as it seems to keep finding new ways to grow. Chola comes across as a more conservative management and though it may not be a bad thing, these kind of companies may not grow too fast as compared to BF. If and when auto sector revives my guess it would be the best option to invest in the frontline auto companies as I think that is where most money will be made as compared to trying to play the NBFCs.
The best case scenario for the pharma companies would be an easing of pricing pressures in the US business. Even now there are some players shying away from some molecules because they are not remunerative. This just might be the beginning.
I think biologics, speciality etc will be a game everyone will ultimately play and adapt to.
Diversification into non US geographies is where some players like Torrent etc are trying to make a foray.
Overall I think the story for pharma may be over and it might be a long time before it makes a comeback. There will be exceptions but the chances of hitting big winners from the sector seem bleak.
True! I was skeptical when most AMCs lined up with Pharma funds few months back. They all said that the right time to invest in Pharma have come, but as we say when everyone finds value, value is missing!
I used to think that the pain came because of USFDA surprises, but the root is much deeper. Cracking biologics with generic-like success may not not be possible, because of more complex manufacturing & approval route. Further, the biosimilars are now said to be at a disadvantage compared to biobetters in terms of interchangeability.
It looks like we have lost one defensive sector for indefinite periods.
How do you look at Technology sector now. You said that the Tier I companies are now in favor, as can clearly be seen in their resilience among the onslaughts in the market. In 2016 there were voracious talks regarding structural change of Tech sectors, and many commented that the transition would take much time to complete. However, the sector rebounded promptly within a couple of years, unlike Pharma, which lost its shine at the same time.
Do you think the story of Indian tech farms has remained intact or improved? Or, the pain is not yet over & we won’t see out-performance from this sector as before anytime soon?
@hitesh2710
Hi Hitesh Ji, Do you track Zee Learn? After the recent meltdown it is available at attractive valuations.
Their preschools (kidzee franchise) businees is scaling fast and should continue to do well as pre-school has become quite normal in metro. I am also hearing good things about their Mount Litera school in Chennai. Any thoughts about this company? I’m currently having a tracking position.
Zee Learn on the face of it looks like having all the hallmarks of a great investment. I used to follow it and had a tracking position few quarters back. But then they acquired Tree House and that turned me off.
Plus the parent Zee’s promoters are having issues of their own. So for me its an avoid.
Hi @hitesh2710 sir, you earlier mentioned in the thread that you usually remains fully invested. I like to know was that the case in this correction from last January.
What strategies you adopt while you wait for technical changes or for invest-able opportunities ?
For me, I struggle in this area. Like for a man with hammer everything looks like a nail. So many items I feel fairly valued only to realise in hindsight that I overpaid.
If you see in the current market scenario of risk off behaviour, investors tend to look out for companies with
reasonable certainty of management integrity
decent consistent cash flows
good divident payouts and future visibility of such payouts.
lesser variables affecting the business.
The larger tech companies tick the boxes on above counts. Hence the preference for these when markets are spooked by uncertainties and fear. Having said that these things can change quickly once risk on behaviour returns to the markets and people tend to chase beaten down stocks or companies having strong growth visibility.
Personally I think Indian tech companies are defensive bets unless one has too much insight into the business models of these companies to find out the big growth stories.
If and when the small midcap meltdown stops and a rally emerges in these names, there would be a strong shift in focus and these defensive names would probably go into sideways mode. For concluding that, one needs to see consistent gains and some euphoria returning to these segments. As of now we have the odd 2-3 days upmoves in these names and then rallies tend to fizzle out.
I do remain invested fully most of the times. Except sometimes during meltdowns when I am lucky enough to be in cash which is not often enough.
One thing I did was to avoid getting into illiquid names as I felt if results or newsflow would be poor exits would be difficult. So I got into liquid resilient names and did some trading while in the core bets, where i had high conviction, I remained invested.
In the backdrop of the rally till 2018, I think our perceptions about valuations had changed and paying 20-25 PE for companies growing at sedate growth rates especially in the small and midcap space was considered ok. But with the current meltdown, a lot of these names have come down to 10-15 PE and sometimes sub 10 PE too. The ones spared the special treatment are those which have a very strong track record of demonstrated growth and management capabilities and integrity. Or the companies which have still been able to deliver the growth promised or expected. Wherever there has been disappointment even to small extent, the stocks have been beaten down out of shape. Some of these could provide good hunting grounds for winners but one needs a lot of homework and then conviction to hold on.
I personally believe that the screen will tell us once the tide has turned. Its better to wait till then and be in solid names with limited downside and high liquidity.
There is no definite answer on how to conduct our investments during market corrections. Each one will be comfortable with a particular approach. So its prudent to figure out what is suitable for our own temperament and follow that path.
Hitesh Ji,
Sometime back you mentioned about the paper industry that you are on ‘wait and watch mode’. What’s your opinion on the paper industry now?? Companies seem to post good results and are also available cheaply without any movement in prices.
