Can we see any trend in midcap IT stocks? Anand Tandon answers

Independent analyst Anand Tandon, says that while Nasdaq has been outperforming in the US, most of our companies are geared towards the banking sector and that is the one that has been doing poorly. So, if you are a services company with a preponderance of NBFCs and banks as your portfolio, you will be facing the same problems that the rest of the group has, which is that there will be some slowing demand at least for the next few quarters.

What is your view on midcap IT and the trend that we have witnessed in terms of numbers?
There are specific verticals where one could get a certain upside because one is focussed on that. Right now KPIT is in a sector which the market particularly likes largely because you are making a bet on EV vehicles coming up quite a lot in terms of overall market and market share and that without doubt will lead to a growth for KPIT.

But I would be a little reluctant to extend the same logic to every other company in the midcap. No doubt, some product is being developed in some of the smaller companies which may be able to beat the general downtrend. But if you are a service company, there is no question that you will have an issue with the global markets being where they are.

While Nasdaq has been outperforming in the US, most of our companies are geared towards the banking sector and that is the one that has been doing poorly. So, if you are a services company with a preponderance of NBFCs and banks as your portfolio, you will be facing the same problems that the rest of the group has, which is that there will be some slowing demand at least for the next few quarters.

What is your outlook when it comes to some of the other key earnings? Brokerages are pretty bullish on SBI Life, on the back of the fact that there has been a strong guidance for FY24 and for HDFC Life as well. What is your outlook in terms of the valuations and structural business gains that the company has delivered?
I have said this repeatedly in the past, insurance, life insurance in particular is a place I like. The runway is very large. Valuations can fluctuate up and down, but this is a sector which you need to own and hold on for at least the foreseeable next decade or so.

You will have that constant erosion of market share that LIC will be having. The private sector will be going up. It is a very long-term business where the reputation of the owner is very important. Therefore, it is unlikely to be a place where some of the smaller companies and less known companies will be gaining any significant share. Over time, even that portfolio will get consolidated.

So, we are really looking at SBI, HDFC and ICICI as the ones that will be left and maybe a few others. In a consolidated industry, market share shifts from public sector to private sector. You just hold on there, the valuations do not matter.

Across the board names like Policybazaar, Delhivery, CarTrade, have all bounced back very smartly from their lows. Only Nykaa has not managed to do so. Lots of issues, rising competition, supply pressures, higher investments and a slowdown concern. Are all of these valid when it comes to Nykaa?
Well, it is valid. There is a question that finally it is one segment of the market on the retail side and the valuations that the company came in at were very stiff, which is true for almost all new-age companies that got listed from private equity or PE funds exiting into the market. At some stage, all these things have to be settled.

Once you start making money and start looking at the earnings multiples and so on, you will find that even now, most of the companies which are promising to break even or have shown some cash breakeven will look very expensive. I do not know what specific issues with Nykaa in terms of supply chain, etc, are, but finally it is one niche market. It will settle down at some stage to the extent that it has always been or mostly been a profitable company, at least there is some parameter that you can use to figure out where you want to be.

For most of these businesses, there is a lot more maturity needed both from the point of view of the management, the kind of organisations that they built up, the people that are working for them and the optimisation in terms of their salaries before you could argue that these are stable businesses that need to be valued.

At this stage while Nkyaa has one thing going for it, that addresses the higher end of the market and that is the consumer discretionary space which is likely to do well given the current macro that we are in, There are easier ways to play it in the form of either consumer durables or perhaps even two wheelers, etc, or four wheelers.

Voltas has been disappointing the market with respect to earnings quarter after quarter but we do not see a sharp decline in that one. It continues to be in Rs 800-900 range of late and Shoppers Stop has been a bit of a turnaround story this year or rather this quarter, reporting a profit versus a loss this time.
Voltas has not actually delivered anything worth talking about for a reasonably long time but the pedigree of the group keeps the valuations high and there is always some belief that going forward things may change.

What about capital goods? What is your outlook within that space? Within the railway space, we have been seeing the likes of RVNL, IRCONhve been abuzz of late. What is your outlook given that a lot of experts have been alluding to the fact that the capex cycle is strong and the order booking is looking very encouraging?
It does look like the order books are good and most of the commentary generally has been quite positive. But I cannot think of too many largecap companies that funds could be buying other than perhaps Larsen, which is why L&T traded at the kind of premium that it does.

While you may want to buy some of the capital goods companies, valuations are already reflecting whatever their order books are and a lot more. There is not that much value left. On the railway side, there is no question with the Rs 2.5 lakh crore capex budget that the government has announced or the overall railway budget.

There will be a lot of order flow coming through. Some of the companies like RVNL etc are largely consulting businesses, besides having some of their own assets but mostly consulting businesses, which is where the growth has been – will obviously be beneficiaries because there will be a lot of studies to be done before this capex is going through but they should have been lead indicators, they should have been making the money before the capex was really announced and therefore we are likely to see the end role that they are playing today. Unless you are making a point that railway budgets will continue to be big for the next several years, you may find that it is better to look at the suppliers today rather than the consultants