Q2 numbers the next trigger, focus still on IT, pharma & auto: Kunj Bansal

We will continue to see outperformance in smallcaps and midcaps. Within that, it will happen in IT, some consumer names, some listed IT/digital companies and cement, says Partner & CIO, Sarthi Group.

What is catching your eye? It seems to be changing every day, one day it is pharma, one day it is auto, one day it is IT but the index is not really moving the needle too much?
The last time the market was continuously moving one way up was in July and somewhere around 27-28 July we had touched the similar level of Nifty that we are at today. For the last one-and-a-half months, the market has been consolidating or correction has been happening.

Whenever we have this kind of range-bound movement of the market, it gets support from the sectoral and even stock rotation. So we have been seeing one or two days auto participating and then in the last two-three days, we suddenly saw the IT sector participating. Before that, metals was the torchbearer for one or two days and that is something that could continue to happen.

Now we have to wait for fresh triggers which will come by way of September quarter numbers from the second week of October onwards and till then, probably the market will continue to remain range bound. In between, we have been having Sebi announcements coming in last week on small and midcaps. These kinds of events will keep affecting the market. But pending that, in the absence of any significant negative as well as positive news flow, we could continue to see the market remaining range-bound and waiting for the September quarter results in October.

Within the auto pack, we have seen the rural demand story playing out for M&M or Escorts. Would you stay away from some of the others at this point or still go for that value play?
You are right if we look at the sector in terms of numbers, development progress or news flows. The numbers which came in for the June quarter results were expectedly low in the range of 50% to 80% because April and parts of May were complete washouts. The good thing after that has been the sustained demand growth in July and August not only in primary sales but even in the secondary sales.

If we look at the automobile registration numbers across the country, the demand has been there. Extending that, auto ancillaries have clearly given a picture that their order books are almost full from their customers that is the auto OEMs and so it looks like the demand will continue in September also. In the September quarter, we should expect good numbers. Within this, there are specific pockets and a) two-wheelers have been doing well. b) agri equipment that is mainly the tractors, have been doing exceedingly well and we have had growth rates in the range of 70-80% plus from the tractors and passenger vehicles. Commercial vehicles still seem to be taking time to pick up because earlier there was over capacity although there are signs that the pick-up has been happening.

Secondary market checks also show that in very specific regional pockets suddenly capacity is short but on an overall country basis, the capacity is high. So commercial vehicle stocks are avoidable. Suddenly a lot of hope has built up in terms of GST rate cut, especially for two- wheelers. That will continue to remain a good place for one to keep buying at every correction. In fact, as the market is consolidating, the same seems to be the case with the automobile sector stocks also. We have not been seeing much correction. For one-two days, there have been 2-3% corrections here or there and then it suddenly picks up. So two-wheelers and passenger cars and of course tractor manufacturers should be bought on dips.


Would you say tread with caution in this buzz about Dr Reddy’s on news of tieup with RDIF for vaccine?
Yes I would think so. Although it is difficult to take a call but still I would tread with caution in the names which have moved much ahead before actual developments have happened. They have moved much ahead either on the basis of expectation or on the basis of news flow. But at the same time, what we have to keep in mind is that the pharma sector in the last four-five months has come out of a four-year long underperformance.

The exit from the underperformance is rightly supported by a little bit of improvement in the June quarter numbers of the sector which clearly is showing growth against almost all other sectors which as we all know have shown degrowth of 50% to 60% whether it is automobiles, consumer durables and so many other sectors. Because of the pandemic, the pharma sector will always come in focus and there will be a lot of focus on R&D and synergist alliances which most of the Indian companies are targeting to do with the global developers.

Pharma, IT continue to be the key themes playing out. Would you continue to focus there right now or are you busy cherry picking?
Cherry picking always helps but if it gets supported by the market movement, then there is an additional benefit. Within that, in the last three, four months we had a sharp outperformance in pharma. That will continue, maybe not at the same pace, based on the numbers that will keep coming in for the September quarter and December and based on the news flows and developments in some specific cases related to Covid vaccine developments or some outsourcing of these kinds of activities to Indian companies. and things like that.

IT, I feel is getting rerated based on the complete changeover that we are seeing in the ways of working, ways of living, the pattern of spending, the pattern of buying things and with the cash flows that these companies have, although their growth rate used to be lower on an year-on-year basis, the Indian IT sector was probably recording high single digit growth and that growth could go up with the valuations going up in the last two days.

There is still a significant scope of rerating there. So cherry picking along with the sectoral tailwind is something that will give us better rewards and within that yes, IT and pharma as a defensive sectors do come in as high beta sectors. Automobiles still figure there. So, these are the three spaces that will continue to be of interest.

What is happening in the tyre space because it is not quite matching up with auto sales on a monthly basis? Clearly, replacement demand is perking up these names?
We are indeed seeing a good pickup in the auto OEM sales specifically in two-wheelers, passenger vehicles and tractors and not as much in commercial vehicles and the same is reflecting in good demand and good performance from the auto ancillary companies.

When it comes to tyres, one of the other factors that overweighs on the sector is the replacement demand along with the OEMs. Replacement demand in some cases is much higher than the OEM demand. And two, the raw material prices. So somewhere amongst these three factors,OEM demand, replacement demand and raw material or rubber prices, the tyre stocks are stuck at and whichever of these three, one or two factors dominate on the tyre sector, determines the performance of the companies as well as the stock prices. I do not frankly have a very specific view on tyre companies so would not be able to talk more than that.

Anything else that you are going to be watching out for over the next few weeks in terms of near term triggers or even stocks that you feel could surprise?
Index wise and largecap wise, the market has been in a consolidation or a time correction mode for the last one and a half month. It touched the current level of Nifty by July end and since then, it has been moving a little bit up and down.

But in the same period, outperformance has come from small and midcaps which got triggered after last week’s Sebi move, asking mutual funds to stick to the true to label definition of some of their schemes. Smallcaps and midcaps is where we will continue to see the outperformance. Within that, it will happen in the IT sector, some of the consumer names, some of the already listed IT/digital companies and some of the ones which are getting listed now. Cement could be another pack.

In terms of specific stocks JK Cement has been moving up in the last few days or months, but on any correction that is a stock that looks good to me.