Worst is not yet over for the IT sector: Digant Haria

"We all know it is pretty-pretty expensive, maybe 60 times earnings or even more is what it trades at. So any small disappointment and the stock gets hammered, it is quite natural. But see Siemens has a history of doing this, most of the MNCs in India have to respond to what their global parents want to do," says Digant Haria, GreenEdge Wealth.

Let us start with these themes since we are discussing it electronic manufacturing, I mean what a comeback it has been. These stocks are moving as if they are the go-to stocks of 2023. The same phenomenon was at play in railways at the beginning of the year and defence last year?
I think for electronic manufacturing, the whole investment community is thinking this is that Maruti moment of early 90s wherein when Maruti came in India with its big manufacturing setup. We really had this whole auto-ancillary ecosystem which developed that Maruti would want all their spare parts and component providers to have factories near it.

And then we saw a 20-year bull run in this sector, say until 2014-2015. I think electronic manufacturing is probably at that stage. It is the third highest imported item in India after oil and gold. So it is natural that India will try to have electronic manufacturing done within their land and yes that is what we are seeing the policy initiatives are there.
We saw Apple, Foxconn, Tesla, a lot of these guys were trying to set up a manufacturing base in India. So all these stocks that you talked about they are like the auto-ancillaries of the electronic space. We are very early in the theme. There is surely 5, 10, 15 years of great growth but obviously, which players really scale up, which players can really live up to the expectations of what their OEMs want, I think that time will tell. But yes, this is absolutely the hot space to be in.

Let us get in a view as to what the outlook is when it comes to Siemens because the sale and transfer of their low voltage motor business to the parent company clearly seem to have spooked the Streets and analysts have attributed various factors. Valuations are lower, minority shareholders may not approve the deal. It is at a time when the domestic market is showing you tailwinds for LV motors. What is your outlook and why do you think the Street was so displeased?
We all know it is pretty-pretty expensive, maybe 60 times earnings or even more is what it trades at. So any small disappointment and the stock gets hammered, it is quite natural. But see Siemens has a history of doing this, most of the MNCs in India have to respond to what their global parents want to do.

They really do not have a choice. And Siemens, we have seen that in 2016, 2013, multiple times they have sold or bought something.

Fair valuation is always a question because India is a very expensive market for these stocks.

Now Siemens had actually outsourced a lot of its manufacturing and what we hear from the market is a lot of their vendors are themselves copying the Siemens technology and selling it as this is Siemens' product so you can buy it at a cheaper price than us.

So I think Siemens had really lost the game in terms of the motors market. As you rightly mentioned that motor market is doing well because of this whole Make in India energy efficiency. I think it is a market which will do well. But it is fine. I think Siemens getting out of this business is fine because they anyways lost focus long back. Here valuations, we can debate, we will probably have these whole discussions for a few weeks and then once they win some more railway orders or some more automation orders or power sector orders, I think people will forget this and move on. So I would just think that this is an event which we should look beyond.

Time to buy into these new age tech companies already?
I would say the negativity around them is gone. But you know, they are all showing profits and like a year back, we all wanted to see growth. We valued them at 15-20 times sales because they were going to grow and they were going to grow at say 25, 30% CAGR for 10 years.

We are already seeing that growth is getting punctured because they have started focusing on profitability. So I just think that these stocks are far more reasonable than in the past.

But we are still a little away from just going out and saying that, hey, these valuations are fine, you should go in and buy and you will make big returns. I do not think we are at that stage for any of these fintechs be it PB Fintech, be it Paytm, be it Zomato, be it Nykaa we are nowhere there.

Let us take stock of IT as well. We have been highlighting as to how IT the sector has been a gainer for the last three consecutive trading sessions while Infosys continues to be a year-to-date loser that is not quite the case with some of the mid-cap IT names. What with the move on a CoForge and an LTI Mindtree, they have all been scaling up very, very nicely. Worst behind IT you think?
I am not so sure that worst is behind because the worst or the best for IT depends on what happens to US and Europe. And I think we are seeing some bit of stability there after the big down move last year but that does not really mean that the bear market in the US especially is over.

I just think that we will see one more down leg there and most of these IT stocks will respond to what happens to the US markets.

So I think that is a very broad view that the worst is not yet over but then within the sector I think there is a case for separating some of those companies, the large companies which are really dependent on the US macros and some of the smaller ones like a Cyient or Zensar where there is a standalone turnaround happening in their own individual businesses.

So I think yes, IT broad view is where the worst is not over but that does not mean that there are no pockets of opportunity there. But it has become more stock specific in IT rather than the sector as a basket.

I do not know if you track Adani stocks carefully or would recommend buying into this, but definitely a big overhang gets lifted right after last Friday's announcement of the Supreme Court giving a clean chit?
I think all those legalities I would leave that aside and what we really look at is, are they able to service their debt? Are they not expanding at the pace at which they did in the past? I think both the answers are there. Let us see one they have really stopped expansion. We have heard of no new order wins, no new land purchases or new project entries by Adani which is the right thing to do.

Second is they had a lot of international debt and after an event like Hindenburg, they should focus just on ensuring that those debt holders do not pull the plug because that is the lifeline for any group which is involved in infrastructure creation. So I think they are focusing well, they did one round of deleveraging by selling shares to GQG. I think they are trying for a second round of share sale where they will again repay some Rs 15000-20000 crores. I think if that second round of share sale goes through, I think the overhang for this group in terms of the banking sector exposure and the group not being able to service debt, I think a lot of those things would be over because then the next large repayments happen towards the end of 2024 which is reasonably 18-20 months away.
So from that angle, I think what Adani is trying to do, it is the right thing to do. But yes we are not tracking the individual stocks from an investment standpoint.

Where will these stocks settle? I mean, it was an absolute frenzy, let us say in the month of, same time last year, they were expensive also frankly, if you look at the traditional benchmark like price to book or even PE multiple when you look at the valuations in Jan, post that these stocks got hammered out of shape and now they have recovered. Where do you think these stocks eventually will settle?
We have all seen during IL&FS and the NPA crisis of 2016 to 2018 that until there is that overhang, you cannot really call out levels because not every business of Adani has hard assets, cash flow throwing assets, a lot of them will throw cash flows somewhere in the future.

But today, there are only these three companies which throw like real large cash flows which is the Ambuja Cement and ACC together and there is this Adani Ports. And lastly, there is Adani Enterprise which has the Mumbai airport also. So I think it is very difficult to really value because when the perception goes for a toss like one event not able to roll over some debt, it will again start the scare in the stock.

So I think whenever such debt related events happen, we have to just look at debt and not look at the stock price at least that is what I learned during the IL&FS crisis and the NPA crisis of 2016 to 2019.