Amidst all the chatter about high valuations, what is it that you are making of the market right now? Put fresh money to work at these levels? Yes or no?
Pramod Gubbi: Overall, the market seems to be on the higher side in terms of valuations, particularly given the sort of earnings that we are getting. But markets are markets. There are always pockets available to deploy capital. There are pockets available at reasonable valuations or if they are fairly valued, there is enough predictability in terms of earnings growth, so that is what a discerning investor should do. But we have to work with the constraints that the market has provided.What are you making of some of the private banking names and the kind of earnings that have come out so far? While ICICI Bank may have been impressive, there is no consistency throughout the space, especially from the big ones. How would you approach private banks now?
Pramod Gubbi: The private banks are still one of the few pockets of value that I was talking about. Yes, there are issues in terms of margins, deposits are coming at higher costs. To that extent, margins are under pressure. Incrementally, as we proceed through the economic cycle, you will see asset quality deteriorate as well. So, both of these will put pressure on earnings growth, but nothing that the market is already not factoring in given where valuations are.
To that extent, if you juxtapose those expectations alongside current valuations, I think they are not that disappointing. Yes, there are different levels of performance across different banks, but at the same time, there are different levels of valuation and expectations of the market. So, I would reckon private sector banks remain one of those few pockets of value.What is the view on autos right now? I know you guys have stayed away from autos, but is it time to look at it incrementally positively or at least in the supply chain somewhere?
Pramod Gubbi: No, it is not like we have stayed away from autos. We do have some exposure, both at the OEM level as well as the ancillary level. I think we are in a reasonable stage of the economic cycle as far as demand is concerned. And also, given that commodity prices are easing, margin pressures and earnings growth are on a decent footing. But like I said, market as a whole has not left much value on the table which is why you need to be a little more discerning in terms of looking at businesses where there is predictability of earnings both in terms of demand drivers as well as margin expansion drivers. It is very hard to see a cheap automobile stock, but even if it is fairly valued, you need to give yourself the comfort that the earnings growth is high confidence panning out over the next two to three years. But yes, it is not like we have stayed away from autos. We have a very close eye on many of the auto companies.
In terms of a trigger for the market, do you think it all boils down to earnings or are there any other triggers or cues you are looking out for for the market to move whichever way?
Pramod Gubbi: We are bottom-up investors. To that extent, we stay glued to earnings, earnings potentials, and changes at the economic level which could change the growth trajectory from some of the sectors and companies of our interest. However, triggers for the market would come from anywhere. So, it is a global situation now that foreign institutional investors are coming back. They can become influential in the market.
To that extent, we are exposed to what happens globally as well, including potential rate cuts in the US, and geopolitical tensions we have all been talking about for a while now. But at the fundamental level, now that the budget is out of the way, you have some sense of political stability and direction coming back, it comes down to earnings and earnings is something that somebody like us focused on bottom-up fundamentals, would reckon are triggers for individual stocks and sectors as well.
What is the view on chemicals now? A lot of these companies have started showing signs of a bounce-back, but that has been the case for the last couple of quarters as well. Would you want to make a fresh bet within the chemicals agro basket at all?
Pramod Gubbi: Yes, again, I do not think you can paint everything with the same brush because some of these sectors or chemicals are exposed to the global supply chain, in which case China becomes a big factor given we have seen the impact on prices of several commodity chemicals after zero COVID policy was lifted in China and Chinese chemical industry entering the global supply chain. To some extent, there were signs over the last couple of quarters that that sort of dumping pressure is eased, but it remains the key variable here because the local Chinese economy is not doing well as we understand. To that extent, the scope for further dumping or pricing pressure on some of these chemicals will be the biggest variable to watch out for. Having said that, there are always pockets within specialty chemicals where there are defensible companies whose products are differentiated or at least they are competitive.
To that extent, there are moats to be protected on earnings. Plus, we have the structural driver. Global buyers are looking to diversify their sourcing, looking at some of the Indian chemical companies in an alternative sourcing avenue for them. To that extent, structurally, I think there are companies and subsectors that are very strongly positioned, but the bigger variable for the sector as a whole remains the pricing pressure coming from Chinese companies.
