Why moving from deep cyclicals to IT and consumption makes sense now

“The rotation in terms of portfolio will move towards the IT pack from banking which has done really well. There was a China open trade that was panning out that has kind of disappointed and possibly that has played out so people are moving from deep cyclicals to IT space and some consumption space as well,” says Dhananjay Sinha, Co-Head of Equity & Research, Systematix Shares

What is your take regarding the IT sector because that is seeing a good comeback and even if we look at the brokerages note, etc, they are talking about how the risk reward is really favourable. Would you want to take that bet and if yes, which IT names?
I have been overweight on IT for the last two-three months and the key argument is that the risk of a recession or the sentiment towards a recession is actually fading, that is something that was bogging down the IT stocks last year. There was a contraction of roughly about 25% in the IT index, that is one.

Number two is that the dollar, which was actually weakening possibly, is kind of bottoming out, maybe the rupee will weaken as a result of that, so rupee weakening is another add on and I think the valuations had come down because of the steep correction that happened last year.


Fourthly, the retrenchment that is happening in the US tech space, especially relating to digitisation etc will reduce the pressure on IT companies, especially the labour costs, etc. As a result, the margins would start bottoming out. More of those trends will be visible as we go ahead and as a result of that the rotation in terms of portfolio will move towards IT pack from banking which has done really well. There was a China open trade that was panning out that has kind of disappointed and possibly that has played out so people are moving from deep cyclicals to IT space and some consumption space as well.

Where within the auto and auto ancillary space do you believe there is potential after having had a look at the numbers from Bharat Forge as well as Bosch and even Eicher?
This quarter has been pretty good for the auto pack. There has been a sort of margin expansion and all. I think there are three variables that are relevant. One was that there was a volume expansion that was happening. There is a pent-up demand, etc, that was there and there is a leverage spending that was happening.

Secondly, a lot of premiumisation is happening across multiple segments and finally, we have seen in this quarter that there is a significant margin expansion. We have been fairly optimistic or overweight on the auto space. I would say that Eicher Motors is something that I would still bet on. Commercial vehicles might actually start peaking out. So, we still have Ashok Leyland and all there, but I would say it might start peaking out in terms of momentum. I would say Hero Motors is more aligned to rural and all. It has not done well, it is a kind of value stock. One can look at that at this juncture.

Your take as far as this entire insurance space is concerned, there was that deep correction that we saw post the budget announcement. Do you expect that the downtrend will continue or is there a case to be made to look at these companies now?
The insurance space has actually been an underperformer for the last one, one-and-half-years and following the Budget announcement also, there has been a sort of a correction. The valuations of the top-notch companies such as HDFC Life and SBI Life, etc, have become very lucrative. I would say that it may still lag in terms of outperformance but I would say that from a longer term standpoint these companies look good.

If you were to pick one or a few top bets within the entire midcap FMCG stocks, what would stand out?
We are positive on the FMCG space. We have all the largecap names. Britannia is there. I would say Marico can be looked at and Emami has been an underperformer and is value as well. One can look at Emami at this juncture in the FMCG pack.