If I have to make a bet, it will be on a U-shaped recovery: Pradip P Shah

A V-shaped recovery is very difficult. I expect a more gradual recovery. I hope there is no W-kind of thing where we have a recovery and then suddenly there is again a spike in infection and lockdowns, says the owner, IndAsia Fund Advisors.

Are you still going with the defensive theme or are you starting to look for quality opportunities in the broader markets?
It’s a volatile market. We had a great low in March and then it bounced back very smartly. There is always an opportunity to make money in individual scrips. The broader market will over time trend with the fundamentals of the economy, but individual companies are doing very well and you can even identify these by sectors.

We had always thought of IT as a good sector for an investor and it has shown recently how well it is growing. Similarly, the pharmaceutical sector and companies that were in the western markets with branded drugs or generics or sometimes branded generics, have done very well and of course the Indian market has continued to do well in the pharma sector overall though there has been some decline because of the lockdown.

There are certain sectors where recovery might be affected, for instance hospitality, aviation, media and retail sectors and so on. Those will take some time. Overall, the economy will be at a lower level as compared to pre Covid levels and eventually the market will also reflect that but in the meantime, there is liquidity and interest rates are going down both in India and globally and that is driving up the market.

Earnings have surprised and have been pretty much in line or a touch better than estimated. Still awaiting a few from the consumption pack even though most of the larger names have already delivered?
One of the things was that raw material costs went down for most companies quite substantially because the demand fell off and those who had the supply chains intact were not affected. Raw material price reduction, even when the demand had gone down helped in improving margins but I wonder if it will continue.

There is a CRISIL study which says for FY2021, the top companies expect revenues to go down by 15-17% and EBIDTAs to go down by 25-30%. That is a big drop and the great thing is no one can predict how the economy will do or the individual companies will do. The uncertainty is great and it depends a lot on the trajectory of the Covid-19 outbreak. If for instance, it gets controlled with or without the help of antidotes and vaccines, then certainly the economy will bounce back faster.

There is some pent up demand. The agricultural sector was very good and that demand is going to be reflected in the coming season as it is being already reflected in some sectors. That will help the economy.

Now overall, it looks as if the GDP will be at a lower level, ICRA has suggested a 9.5% reduction. Germany and the USA reported 9.5% and 10.1% reduction in quarter to quarter GDP. We will have similar consequences here.

Again another study where they studied 40,000 companies have found that 68% are facing some kind of stress on the payroll. They will be cutting pay or cutting the workforce. All that will get reflected in demand. So while this bounce back is a kind of relief, it is not worse than imagined and the lockdown is getting lifted’.

We will have to face some reckoning and the banking sector will show some reckoning after the moratorium ends and whether people start paying as they were paying earlier or whether there is some change. We also have to see if the government allows for restructuring of loans because maybe there is a need for something like that to stimulate the economy.

HDFC Bank has announced its new CEO, someone who has been with the bank for two decades plus. The market is definitely seeing that positively?
One of the great uncertainties hanging over HDFC Bank got lifted and that itself is a great relief and then there is an insight and which have been proven, well established, well known, well recognised person. This is all very positive for the bank but the environment is not clean and there is going to be stress in the system because companies will have cash flow issues if demand does not come back to pre-Covid level. That will probably take a year and a half to come back.

What kind of opportunity you are sensing within the specialty chemical space?
The specialty chemical stocks have run up quite a bit and a very obvious example is Deepak Nitrite. But part of that was because of the problems related to China. There were environmental issues, If you saw the trend for last year odd, Indian companies that were serving global markets with better environmental controls recognised by the customers as being environmentally friendly were getting demand.

Now we are seeing even better opportunities for Indian companies and some of them have built up capacity and positioned themselves with customers very well. The Government of Japan is giving some incentives for Japanese companies to move out of China and everyone is trying to reduce their sourcing from China and so India is an inevitable beneficiary.

In India, the specialty chemical and the pharma sectors are getting a benefit of an educated pool of people and that also provides a competitive advantage. We are seeing it in other industries also. Engineering is going to be one other area which is going to see that. Some companies like Jio have taken a lead in R&D. Apple is coming to India because they have discomfort with China. The blend of educated talent and workforce is going to be a great winner for India.

There is severe slump and impact on sectors like retail, hospitality, travel & tourism and aviation. Do you think that the long term story is likely to play out? When things improve, will there be some sort of a V-shaped recovery even for these sectors?
A V-shaped recovery is very difficult to foresee for consumption facing sectors such as movieplexes, restaurants, retail. It will take some time for people to come back and a vaccine is discovered.

I expect that the availability of the vaccines will take till March and then to spread all around the country will take months and months of effort. A V-shaped recovery is very difficult. I expect a more gradual recovery. I hope there is no W-kind of thing where we have a recovery and then suddenly there is again a spike in infection and lockdowns. If I have to make a bet, it will be a U-shaped recovery.