2 stocks Pankaj Murarka is betting on in 2021

For 2021, Pankaj Murarka likes Aditya Birla Fashion in retail sector and Tata Motors in auto.

ETMarkets.com
The tailwind and the opportunity for platform and digital businesses are huge and some of these businesses will have a J-curve growth, says Pankaj Murarka, Founder, Renaissance Investment Managers.

While Reliance may be performing today, it has been a bit of a laggard. Your view?
After making a phenomenal move all through last year, Reliance had paused or taken a breather. From a slightly more medium term to longer term perspective, our house remains pretty positive on Reliance because we think they are at the cutting edge of both telecom and digital business and we are extremely bullish on both these businesses. The stock has been in a consolidation mode for the last few months but it will do well. We remain positive on the stock.

How are you approaching the so-called internet and platform and digital theme now? What about companies like Info Edge or IndiaMART?
Well to be very honest, just sit tight. Do not do anything. I understand where you are coming from, the valuations on the current numbers or the forecasted numbers over the next couple of years look very elevated but the thing we have experienced with some of these businesses which essentially experience J-curve is that analyst or investors do end up grossly underestimating the future growth potential.


Go back to the late ’90s and 2000 when some of these IT companies were going through a phenomenal growth period. remember being an IT analyst at that point of time. Every quarter companies like Infosys and some of the other listed companies used to surprise us on their growth by a very wide margin and there was a point of time where Infosys was growing 70-80% CAGR for a period of three or four years.

All I am trying to say is that the tailwind and the opportunity for these businesses are so huge because India has clearly reached an inflection point in terms of smartphone penetration and following the collapse in data prices, some of these businesses will have a J-curve growth. It is very difficult for any analyst to precisely pinpoint or estimate their earnings forecast and when stocks go through this kind of a growth cycle, they tend to trade at valuations which might seem obnoxious.

There was a point of time when Infosys traded at 140 PE. One does not know what their real value is. The whole idea is that we are playing it from a 5-year, 10-year perspective just sit tight on them.
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Take a look at IDFC First. This one really stood out last week. What is your take on the bank and even broader market financials?
Well I do not have a specific view on IDFC First but in general we like private sector banks. Clearly there was a significant rise in NPAs in these banks and what we are witnessing is that the recovery in the economy was far stronger and surprising on the upside which effectively means that the stress or restructuring that these banks are witnessing is much lower than what was feared by the market.

Effectively, that implies post the expiry of moratorium. the likely slippages or NPAs we are likely to witness from these banks is going to be significantly lower than what the Street expected at the start of the lockdown in April and May. Some of these banks have raised significant amount of capital which effectively means that as the economy recovers into the next year, we are looking at a very strong growth coming back into these banks with very solid asset quality. Generally the outlook for private sector banks and especially the larger private sector banks remains extremely constructive.

What are you expecting and pencilling in when it comes to earnings for the capital goods sector and L&T which has seen a robust order inflow so far?
For capital goods and infra companies, this year is not about the reported numbers. In the first two quarters, their business was impacted because of migration of labour and this quarter, things have moved back to normalised levels of activity gradually over the course of last quarter. Numbers could be all over the place this quarter and they might not look as robust year on year on a comparative basis but what is striking is this year is all about order book or order in take. If you look at Larsen &Toubro, their order intake in the nine months of this year is the highest they have ever done in the last seven years.

What we are seeing is a very strong intent in terms of doing capital expenditure both by the government and at the same time we have seen a lot of projects at the state government levels and some projects at the private sector level also. All of this gives us a very strong signal for a strong recovery in all of these companies going into next year and more importantly about a more broad-based recovery in the economy going into This quarter numbers for capital goods companies are more about the order intakes than about reported revenue or profit numbers.
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Any comment on Karnataka Bank’s Q3 show?
I have not had a chance to look at the numbers but I gather from what you said that this should essentially be the trend going forward for all the banks because Karnataka is one of the early ones to report the numbers. What we essentially see is provision cost of the banks will decline on YoY basis going forward starting from this quarter because one, the slippages into NPAs will be much lower than expected and secondly, banks have created cushion or incremental provisions already ahead of the quarter in the last two quarters. We expected some NPA slippages out of the Covid moratorium and given the fact the trend that we are likely to see, slippages will be lower than what we expect for the private sector banks as a whole. Secondly, provisioning cost should start declining on a YoY basis and a combination of two should mean that the profit growth will be reasonably good.

The underlying message that companies are telling us is price hikes are happening. How come nobody is panicking?
I think it is too early to start fearing significant inflation. A moderate level of inflation is good for the economy -- be it the Indian or the global economy. RBI for itself has a mandate from the central government where they have committed themselves to contain inflation within a corridor. RBI still thinks that by the end of this year, our inflation will be well within the corridor though we have had some overshoot from a short-term perspective over the last few months.
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Having said that, significant underlying deflationary trends have been playing across India and the global economy for the last many years. If you leave aside the strong demand resurgence that we are seeing over the last six months, the last five years have seen the weakest industrial growth India has ever seen in the last 40 years.

We are coming from an extremely sluggish industrial cycle, the resurgence in demand effectively means that we are seeing a strong revival in capacity utilisation across the manufacturing sector and that is very good for the economy. Some of this price hike could also be partly because there are short-term supply side issues because as factories and manufacturing capacities are getting back, they are facing constraints in terms of getting to their full optimum capacity utilisations.

We have to see wait for some time to see how much of this price hike sticks around and how much of it translates into short-term price hikes versus long-term spillover into inflation. We will get clear signals on that around April or May. Having said that, if inflation ecomes a concern then I am sure the central bank will act.

But the first rate increase from the central bank as and when it happens is a sign of a strong economy and a strong underlying growth and should not be a sign of concern. It is too early to feel too concerned about inflation at this point of time. There seems to be a very strong demand revival in the economy.

What is your positioning for 2021, are you looking at IT, pharma or you are turning to inwards looking sectors like fertilisers, industrials and capex dominated themes? If the economy is bouncing back, high debt and low ROCE could translate into operating leverage and financial leverage?
That is right and we did that for a fair part of the last year, actually we are gradually making some tactical moves in our portfolios where we have actually taken some exposure to some of the domestic oriented sectors so for example autos is one which we have been invested into right through the middle of last year and we remain pretty positive.

Our view still remains that we are likely to see a very strong recovery in the economy going into the next year. The consensus is India will do a 16-18% nominal GDP growth. I understand that a part of that is coming from the low base of this year but India has not ever seen that kind of a nominal GDP growth.

And if you get a 16-18% nominal GDP growth then that growth has to be very broad based. Most of the domestic-oriented sectors will see a very sharp rebound or recovery and we are already seeing signs of that. It is time to look at the domestic economy very closely and I firmly believe that probably we will also see the revival of India’s investment cycle which has been completely missing for the last 12 years. We are looking at some of the capital goods and investment oriented sectors very closely and probably would be making that move into our portfolios sometime over the next few months.

How much cash are you sitting on? I am trying to understand that are you looking at a tactical opportunity in the market?
We are not sitting on much cash. Our philosophy is not to take cash calls. The cash holdings in our portfolio is under 5% and that is also because the portfolio is under transition. Otherwise, we generally tend to stay fully invested. I must confess that even pre Covid, before the market collapsed, we were fully invested and we took the brunt in our portfolio in March when the market collapsed.

When we spoke almost eight, nine months ago at the peak of the pandemic crisis, your big idea was InfoEdge. What is your big idea for 2021 because InfoEdge now is richly priced?
We like retail as a sector. We think as the economy recovers, the consumer spending will come back very strongly. Within that, we have ownership in Aditya Birla Fashions. They are the largest branded apparel retail player in India and we remain very positive on them because we think the potential of the business is enormous.

If you look at the top 20 companies globally, you will find that three of them are global apparel retailers. Consumer spends on apparels will increase and in India some of these apparel retailers will do phenomenally well. We like retail as a sector.

Within auto, we like Tata Motors as well. We have been owning it for a while now. Tata Motors of today is very different from Tata Motors three years back. They do not think about themselves as an auto company anymore. While they run auto business, their mindset is more of a consumer and a technology company. So over the next few years, we will see a very different Tata Motors over the last 30-40 years.
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