Pharma & tech cos will continue to perform well going forward: TCG AMC

‘As economic activity resumes, expect a further revival in the market in the coming months’

BCCL - Non Copyright
In terms of coronavirus, the impact has been minimal and HCL's sector allocations of IT services have been fairly robust.
RIL valuation will see significant upside over the next couple of years, says CIO & MD Chakri Lokapriya.

We have seen Wall Street recovering all of the losses for 2020 while back home, we are still underperforming. Do you see light at the end of the tunnel? Do you think with the partial opening, things are only going to ease out from now?
Yes, I would agree with you. We should see recovery as the lockdown abates and normal activity resumes. If you look at the US market, Nasdaq is back to where it was pre-corona. That tells you a couple of things. In the case of information and technology as an industry or pharmaceutical as an industry for India will continue to do well given that the other sectors are fairly valued at current levels. As the lockdown ends and a resumption of economic activity begins, you would see a further revival in the market in the coming months.

What is your take away from the Reliance deal buzz coming in?
If we look at Reliance Industries, post these three deals, the debt will come down to roughly about Rs 40,000 crore from about Rs 1,60,000 crore. The company is now probably ahead of its targets in terms of deleveraging. Also, its refining and petchem businesses can support a fairly high level of debt because these are largely spread businesses. But I think Mukesh Ambani is turning Jio platform into a tech company and if you look at any leading tech company around the world, whether it is Google, Facebook, Netflix, they are all largely debt-free. Now in making Jio as a subscriber platform as well as a user platform, you are converting it into a largely subscription come and use as you go kind of a platform, which with the huge scalable potential in terms of the mom and pop stores will benefit from being able to offer a wider basket of products.

The distribution chain of Reliance Retail will help them in sourcing the products. And along with this reach, the valuation for Reliance Jio as a platform and Reliance Industries as a whole will see significant upsides even from current levels over the next couple of years.

How are you looking at the entire consumption basket? The valuations have run up quite significantly. How are you looking at the overall valuation picture when it comes to FMCG?
FMCG is in two halves. One is staples and second is discretionary. As far as staples are concerned, life has not really changed that much; people needed toothpaste pre-corona, during corona and after corona. So I do not think that demand spikes will be much different except for the availability which is largely being addressed.

Second is more staples-like but discretionary in nature like a Domino’s Pizza. If anything it has shown that pizza sales or any online delivery has actually withstood time and demand has largely remained in line.

And one of the biggest things is human life always finds a way. The second liquor stores were opened, people lined up to buy liquor; all the social distancing norms were forgotten in seconds. So life really did not change. It all came back in a second. So from that perspective, as normalcy returns, life will go back to normalcy fairly rapid levels. Yes, initially in movie theatres you might have an alternate sitting which means 50% occupancy but think about this. Show me when did movie theatres run at 100% occupancy? Their occupancy at best was only about 65-70%. So from there, if you do an alternate thing, it comes down to 50%.

So as and when the lockdown is lifted and as long as there is no second wave, life will limp back to normal at a fairly rapid pace as it has done in previous pandemics and epidemics like Ebola. Few months after the virus reaches its peak and passes, life will go back to normal and then consumption will therefore go back to normal. Yes, the next two quarters will be hit but after that I think it will pretty much be even-steven thereafter.

Let us also understand what exactly is your take on the NBFCs?
For NBFCs, clearly this moratorium is an issue. As RBL Bank’s numbers have shown, when people do get a chance to take a moratorium or a payment holiday, they will do so and nearly 35-40% of RBL’s retail book opted for the payment holiday. I think you will see the trend happening in NBFCs and some of the NBFCs like Cholamandalam or even Mahindra & Mahindra Financials are largely commercial vehicle or vehicle automobile industry-driven.

Now that demand is unlikely to come back in a jiffy, it will take some more time. There is enough slack in the system out there in terms of idle trucks and vehicles but the valuations are in their favour. You will see NPAs going up, you will see increased slippages, additional provisioning that needs to be made but I think valuations are pretty much close to the bottom. So there is not much of a downside to the well-run NBFCs.

The earnings numbers have been mixed so far. Some companies managed to somewhat survive this quarter at least, but we do not know what is in store going forward. How are you looking ahead?
For this quarter largely, the impact will be fairly minimal simply because the coronavirus impact was only in the last 10 days roughly in the month of March. Now April clearly is the next quarter which was not good for the auto companies; they had reported zero sales. You will see various sectors such as those and services industries where you will see a fair degree of poor sales.

But some of the manufacturing sectors are beginning to come back; cement factories are beginning to come back on stream and if you look at the cement industry, they have also announced a pricing hike on the expectation that whenever revival happens, the prices will sustain. And banking clearly, as RBL has reported a kind of an increase in slippages, that trend is likely to continue and we are likely to see it in ICICI’s numbers as well. But it is a question of their risk selection of their retail book is, how much the slippages are and in terms of downside for ICICI, it all depends on the numbers but it is currently a fairly inexpensive stock.

What is the outlook on HCL Technologies? We did see a pretty strong set of quarterly numbers?
I think if you look at HCL Technologies, what this quarter has kind of managed to prove to the market is some of the fears the market had were unfounded. Now the fears were of HCL Tech acquisitions; the management has integrated them fairly well.

In terms of coronavirus, the impact has been minimal and their sector allocations of IT services have been fairly robust. Their margins are likely to be maintained if not improve. The company is trading at a five-year low in terms of valuations. If you look, it is probably trading at 10 times PE; now this is way cheaper to its own history and also to its peer group of frontline IT companies. So from that perspective a) an improvement in its margin profile b) its portfolio is intact and c) its acquisitions are going to help in the margin improvement. I think the stock is well-placed from the current levels.





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