Good time for auto to lead recovery; IT recovery will start by Dec-Jan: Deepak Shenoy

“The fundamentals of India remain strong forever and in the next quarter also, results on the Nifty companies will be heavy towards oil companies including Reliance, ONGC and OIL. These are going to create a much higher earnings base for the Nifty,” says Deepak Shenoy, Founder, Capital Mind

How should one look at the last two or three days of price action because S&P is up 7% from the low, Nifty is up about 5% from the low. Is this a bear market rally or beginning of a new uptrend?
This is a very interesting rally. Currently we have to classify it as a bear market rally but a recovery also starts off as a bear market rally. So one way to look at it just from a price perspective is has the price crossed the previous high? The price on Nifty which is the previous high is nearly 800 points above where we are today so it has to move roughly 5% to 6% more before we can call it a real recovery in price terms.

The fundamentals of India remain strong forever and in the next quarter also, results on the Nifty companies will be heavy towards oil companies including Reliance, ONGC and OIL. These are going to create a much higher earnings base for the Nifty. The Nifty earnings itself will look good. Some companies might not do as well especially the consumer discretionary and parts of consumer staples including the FMCG arms will notice some kind of a depression in margins and volume growth. Therefore, fundamentals have not yet given us an indication that this is a major recovery and not that there is a fall yet either. I think we will have to wait before we call this a real recovery.

You were extremely bullish on Reliance Industries. Are you disappointed that from that Rs 2,800 mark and now back to sub Rs 2,500 as we speak?
This is the way the market is going to punish stocks which have good earnings and they are going to reward stocks which have no earnings at all! Honestly, this is not a fundamental driven rally. It is a rally on a fall. The fall itself happened because of liquidity and the rise may be in the past year. Also some of the rise also happened because of liquidity. So I do not take too much cognisance of the last 5% or 10% of the fall. But fundamentally, Reliance is quite well positioned. They now have the capital to bid significantly for 5G when it comes and benefit from it from the telecom end.

The retail end is still consolidating. Eventually Future will go into bankruptcy and they might be able to bid and get all of its assets as well. On the oil front, nothing could be better than $30 gross margins. So, it is good on all fronts. A disclosure, we own it and so are very biased.

I am curious to know what happens to Zomato now with the Blinkit acquisition. The all stock deal with Blinkit is now valued at $650 million. We are seeing some positive flows across the HNI desk today on Zomato?
Possible but the stock is down though I feel here I do not particularly like the valuations here. The fact is they are going to spend another Rs 3,000 crore funding the losses of Blinkit over the next 18 months. They have already given them a Rs 1,100 crore loan further funding the losses. That means they are going to fund about Rs 100 crore of Blinkit losses on a monthly basis all the way till end 2023. We do not know how that is still going to result in profitability. The problem from a business model perspective is for them to reach a profitable stage, they will have to charge Rs 50 to 75 per delivery. At Rs 15, you might still be able to acquire customers but at Rs 50 to 75, I do not think this has a potential to be able to be profitable.

I think delivery is different in the sense you get much more margins from the restaurants. In the grocery and the other item delivery business, margins are very tiny. So, even if you get volumes, it is very difficult to achieve. So paying Rs 7,500 crore which is Rs 4,500 crore in stocks and another Rs 3,000 crore in combined losses is way too much for a Zomato to pay for Blinkit.

It is not that the food delivery market is contracting yet. But it is a highly competitive business where there are Tatas and Jios and a lot of other companies. It is a complicated acquisition. It is more like a friends and family deal. On top of that, a lock-in share gets implemented after 12-18 months. Zomato, which three months ago was talking about the path to profitability, has now gone and diluted. What is the purpose of this acquisition for a business where the need of the hour is to get cash flows back?
Yes, I cannot agree with you more. Right now it is a business that needs to show profitability and this is just not going to give them that layer of profitability that it needs. I do not believe that instant grocery business will succeed unless you own the wholesale infrastructure, which is what the Tatas have with Big Basket and perhaps the backend chain through their consumer business as well. I do not know if this is going to be independently profitable for them.

Second, of course, like you said, there is a governance question mark on related parties being CEO and ex CFO of Zomato and Blinkit respectively and I also feel here the problem really is that this is a new age business and they really need to prove themselves in terms of building profitability. Otherwise, who will trust new age businesses anymore if you continuously fund losses or ask the market to fund your losses.

I feel the valuations are probably less of a concern than the governance issues and at this point when you get profitable is the question. I do not own it, I used to own it and I am just disappointed by the disclosure levels at this acquisition itself, they do not have audited results, they do not even have due diligence based numbers of what Blinkit has claimed. I feel that is a little bit of a letdown.

Now Paytm is up 30% from the recent low but it is still down 50% from its IPO price. What is the right way of looking at Paytm?
To be honest, we have a conflict so we are not speaking on Paytm.

What have you added in this decline?
We have had a lot of positions in cash in the last few weeks and months but I think going forward as we start to see either a recovery or a momentum, some of our algorithmic trades will automatically pick up momentum stories; but on a fundamental basis. I see this is a very important turning point for India and perhaps one of the things that will get reaffirmed is that the inflation number will start to look like it is coming down towards mid July and mid August when the numbers of June and July come out.

India should perhaps raise rates one more time by about 50-55 bps and after that, we might pause and that is the point when India’s stock market should also find a bottom. At this point, looking at it from a macro perspective we are still buying some of the largecap names.

We have added a bunch of stocks, of course I would not name all of them but we have added more to our existing portfolio as well where we are focussing a little bit more on auto. Auto seems to be leading the recovery at this stage. Very strong stocks and the story has been beaten down for the last about four years. I think it is a good time for them to lead this recovery.

We have two-wheeler direct automakers and some auto ancillaries. We have bought some in the oil and gas space. We already own Indian Oil and Reliance and a little more in the IT space where we think the IT recovery will start by December or January this year in terms of the numbers. We might want to pick them up in advance around now. We think the IT index is a good place to be as well.