It is the turn of capital goods and industrials to do some heavy lifting now: Ajay Bagga

“There is some Street chatter on transmission companies getting level playing field. Some kind of reforms are being brought in by the government. So let us wait and watch for that. Stocks have started moving in anticipation of that chatter and of actual reforms coming through but a lot of the power sector reforms have been done,” says market expert Ajay Bagga.

Is there some renewed optimism not in the pure play auto names but in the ancillaries which are now catching up with the likes of an M&M, Tata Motors, etc? Are you investing or recommending investing in any of the tyre stocks?
Yes tyre stocks are beneficiaries of the ability to hike prices of the end product. But I would say wait and watch, they are coming off a bad, lean patch and in the last couple of months we have seen tyre stocks coming into their own. I would rather go for the end manufacturers. So, I like two-wheelers there, expect that with this harvest and with the festive season gaining traction, we should see even stronger numbers from two wheelers.

We saw pretty good numbers for August and that should carry on. So looking at two-wheeler manufacturers as the first way to go and then I think the CV cycle will come back strongly. There is some traction coming there. CV majors are domestic-oriented. Given what is happening in China and Europe, the global facing companies will find it tough and see demand being challenged. One has to be careful there and stick with domestic focussed companies.

Companies which are exporting to the emerging markets are doing pretty well but those who have strong businesses in China and Europe will get challenged.

Have you looked at the entire sugar space? Is this an investable sector or is it largely a trading bet that long-term investors should stay away from?
It is a trading sector. There are good tailwinds in terms of the ethanol story which has got played out. Overall, we are seeing agri commodities being challenged. We saw some softening coming up post July in agri commodities. Sugar is benefitting from reduced global supplies. So there is some amount of tailwind but more or less it is a trading story only.

Also it is too small a sector and easily influenced politically. The good thing is with this current government and the state governments also getting their act together, volatility in the sugar stocks based on government policies have got largely taken out, apart from one of the issues that we see where export quotas get run out and then the government comes in and allows more exporting. But otherwise, at the start of the festive season, we will see demand going up. Supplies globally are constrained but are they able to export a meaningful amount to make an impact on the stocks? That is the big question. Very short term bets can be taken but sugar is not a long-term story.

What is your take regarding the power sector? Are things different now and if yes which are the top bets in the sector?
I would not like to talk about particular stocks but the BSE power index is a top performer this year. It has been a beneficiary of the increased demand that we have been seeing and they have been able to pass through the pricing to the end consumers. The government’s focus has been on cleaning up the act of the state distribution companies. All that has helped the power companies.

I would still go with the private sector companies. There is some Street chatter on transmission companies getting level playing field. Some kind of reforms are being brought in by the government. So let us wait and watch for that. Stocks have started moving in anticipation of that chatter and of actual reforms coming through but a lot of the power sector reforms have been done.

Now I would be focussing back on banks which have underperformed over last year but they remain the biggest component of our index. Private sector banks are the best bet for me. After that, auto, capital goods and industrials would be my favourite themes. In power, a lot of gains have already been done. It is an outperforming sector and maybe now it will consolidate. We will have to look out for triggers. Growth is there but most of that has got discounted. Now it might be the turn of capital goods and industrials to do some heavy lifting there.

The IT pack has been the clear underperformer for the last many weeks now and the stocks have come off quite sharply and quite a few of them are very close to the pre-Covid valuation levels. Going forward, should a long-term investor invest in IT?
Long term yes. It is part of my portfolio for long-term investments but for a couple of quarters more, IT stocks may not really perform well. It has largely margin issue, employee attrition issues. Volume growth is there. The companies are spending but if recession takes hold of large chunks of the world, order flows might get impacted or postponed and that is the risk the market is foreseeing.

So, we can stay away from all export oriented sectors like IT, pharma for the short term though the strong dollar gives a bit of an advantage but that is getting factored in very fast.

What about some of these platform companies and I am not talking about Zomato and Nykaa. I am talking about the companies which are related to the stock markets and investors like the brokerage houses and AMCs. There are reports about how Aditya Birla might be looking at acquiring a stake in UTI AMC. We are talking about retail investors coming back when it comes to volumes and so Angel One is in focus and of course CDSL. Do you like this space?

As the market corrections set in, as global unemployment rises, you will see some of the weaker hands getting out of the market. These are not very secular stories. Yes as the service providers to the entire ecosystem of trading, they will continue to do well but they are priced to more than perfection. They have already priced in so much growth, will foreign investors seeking growth invest in them even at these levels? Definitely. So, there might be some chance.

AMC businesses have flattered to deceive if you look at the performances after IPOs. They have not kept in sync and that is the global reality of AMCs. They do not require huge levels of capital. Scale comes in but it is a very fragmented business globally.

Unlike in India where the top 10 really control the market, globally there are a number of companies and then there is a huge tail of companies that really come in. So financialisation is a big plus point for them. Mutual funds still being 4-5% of household savings, a big plus point is it will continue to grow. The army of traders is increasing in India and 10 crore will go to 20 crore. How much will they trade and what will be the profitability with virtually no entry barrier if you have a good software application and get a good team in place for the operations? The risk management more or less the SEBI and the exchange has taken care of for you with the kind of very tight risk management that they have brought in.

So there are very low entry barriers. I do not know when one of the giants wakes up and starts to enter the space, what will happen to the newbies. I would bet again on the main line banks and the NBFCs. In Insurance, a kind of policy remorse has started to set in and that normally comes in as the economy slows down.

So we have a good growth rate but one can just peel the onion a little more and look at second order, third order; 23 million policies were remorsed out last year as against a normal average of 7 million life policies that get remorsed every year. So I am a little wary of these kinds of valuations.