What are the expectations from the market for the budget this time?
I think the focus would be rural and urban poor and people who are still struggling. Already if you see the housing finance companies have ramped up in anticipation that there will be more housing announcements. Just look at Home First, look at Aavas, look at Shriram of the world and Bajaj is coming up with a Bajaj Housing IPO soon.
So, there is a run up there. There is some expectation building up in the consumer names and the rural focus names.
We have seen a bit of a recovery even in agrochemicals from where they were, let us say, about a month back.
So, I think market is trying to build that up and that is why I am saying you got to see how much good news the budget can carry. But government has more space. The fiscal deficit is 20 bps lower. Also, the RBI dividend. So, they have a little bit of elbow room to do both capex and investments and be a little more populist and be more rural facing. Having said that, one development which I am watching outside budget is can the gas come under GST? And I think that would be a big re-rating for the entire gas value chain.And a lot of these states which are gas producers, which is AP, UP, Rajasthan, etc, they are mostly NDA states. And if they can get gas in the GST, input credit for the companies on the value chain and then effective taxation also comes down a bit. So, I want to see that what would be the slab rate and all, so that is one interesting space and those companies have not really moved much, whether it is producers like GAIL, whether it is some of the city gas distributors, etc, so that is one space I am keeping a close watch. Is IT a clear avoid barring those sporadic moves that we see or is there some meat in investing right now in the IT pack?
It is never a clearly avoid. You do not know what goes up. Market, the cycles are shorted. I think people have written off pharma and banks also at some point of time when interest rates were going up and we have seen people have written off PSUs a couple of years back, who would have thought that the market cap of PSUs will go up from $200 billion to more than $600 billion.
The entire space, some of them have gone to 5x, so never write it off. And I think valuations are reasonable in some of the large names like HCL Tech, even a bit of Tech Mahindra with new leadership coming in. But I think the focus has to shift from services to more products, software and platforms.
So a lot of small IT companies like KPIT, which specialise in CASE which is connected, autonomous, shared electric, which is the auto software, if I were to club that.
Some niche names more I think is where we are focusing more. HCL is doing very well on the software side. I do not think so the market is capturing the work they are doing. It is a 25% plus EBIT business for them.
Currently, it is clubbed in the main company right now. And then you have, these platform plays like Zomato and Policybazaars, etc, of the world which I think have great potential the way it is scaling up.
So, I think you need to have a combination of ERDs, software business and platform business with IT and maybe a little less on services for a couple of quarters. Once US recovers, maybe even services may look good.
Then, what is the strategy really as we approach closer to the budget which should hopefully be around next month, last week perhaps, or at least latter part of next month? Do nothing, just sit tight?
I think just enjoy sometimes. It is good to enjoy the gains and be happy about it. And wait for bargains. Days like 4 June can come once in a while. But last 40 years if you see, every year there has been a 10% correction. And I think India remains a buy on dip, so be selective. There is no harm in being a little counter cyclical, going towards names where probably a lot of bad news is in the price and maybe rebalance the portfolio a little bit.
I think wherever you have made 4x-5x in let us say PSUs, railways, defence names, I am not asking you to exit, but take some money off, get into let us say something like banks.
So, if you see banks, 25% EPS growth, but because of FIIs selling, now Nifty is only 13-14% up for last two years versus Nifty above 20%. So, there is some catch-up there. And as and when FIIs return, they will at some point of time, there will be some bit of catch-up there.
And as I said, a bit of agrochemical names, maybe deep dive a little more into IT and pharma. Have a little counter cyclical portfolio, something which is out of favour.
And also look at bonds. I have been saying this for last six months, the 10-year bond is now down to 7. It was 7.20 a quarter back. You will see a shallow rate cut cycle in next 12 months, which means even a bond portfolio can deliver double-digit return. So, be a little more balanced and as I said earlier temper down the return expectations.
Would insurance fit in that definition as well? Has been in a lot of those regulatory challenges, that surrender value issue was there. But now everything, at least for the time being, seems to be out and known. Would you buy insurance stocks?
I think there is some valuation comfort in LIC. It is still less than embedded value. It is almost around the IPO price. It is just that the new business premium and their new business premium margin has been slightly lesser. They probably need to have a more diversified portfolio. HDFC life also from highs of let us say 750 plus, it is still sub-600.
It has one of the best metrics, both in terms of the new business premium as well as the persistency ratio, which is policy crossing three years and five years because insurance is a long gestation product.
So, maybe tactically it may make sense, but I am more constructive on capital market plays. The broking names like the Angel or the Motilal Oswal of the world, the CAMS and the CDSL which is the RTA and the depository, some of the exchanges.
Because here, if you see, we just touched probably 10 crore unique customers. We have just about 4 crore unique SIP holders. I think this number is only going to go.
For me, that is like a 5-year, 10-year, fill it, shut it, forget it kind of a play. And most cases, there is a duopoly, whether it is a depository, whether it is the RTAs.
I am more focused there on non-financials than on insurance. I like some non-life insurers, like ICICI Lombard, etc. But life insurance, we have very-very little exposure.
