We are talking about the markets amidst this time of election and the kind of run-up that we have witnessed. How do you believe investors should really be positioning themselves in their portfolio at a time like this? Would there be any sectors that you believe the focus should be?
I think the positioning has to be light, super light. Avoid all leverage positions, especially in futures and options market and overall have some cash in your portfolio because I think it is a major-major event and you can expect a lot of volatility, whichever way the numbers come through and I would just like to be a bit cautious at this point of time. The markets have run up significantly. We are trading at all-time highs and a lot of the positives of the election seem to have got priced in. I think it is a given that BJP victory with a higher number of seats and NDA also with higher number of seats, that is kind of discounted in the market. Any disappointment over there could lead to a knee-jerk reaction, which could see a slight correction in stock prices and if the results were to be even worse than what the street is expecting, then you could see even a further sell-off.
And if the BJP and NDA do get the same number of seats or slightly higher, you cannot expect that to be a trigger for the markets to move up. So, the way I look at the picture just now is that there could be many triggers for the market to come down, but hardly any triggers for the market to continue moving up significantly from these levels. So, I think that it is best to be a little light into this election and major event. And then, if the results are exceptionally good, you can even buy at higher levels but then I think valuations really become extremely challenging.
So, if this is going to be more like an event which is an anticipated event looking at the positioning of the market that the odds, in fact, for a favourable outcome may not cheer the market, a non-favourable outcome may really disappoint the market. So, then why should not one go short? Why should not one raise 15-20% cash?
I am all in favour of raising, not going short, but all in favour of raising cash in the portfolio. Cash in the portfolio is strategic. At some point of time, there will be a correction this year and if you have cash, then you can really buy good quality stocks at reasonable valuations and then get the alpha for the next two-three years or so. So, I truly believe that you should have a significant portion, 10-12%, maybe even 15% cash in your portfolio. Or even then perhaps go to defensive stocks like pharma, software. I do not think they did get impacted much by the election results. Of course, there will be a knee-jerk reaction if at all there is a disappointment and you could see a correction, but these two industries are largely global and we are seeing that globally things are improving. From that point of view, I think both these sectors certainly are good places to be invested in in the case of a high degree of volatility or a sell-off in domestic markets.
There was once upon a time when I was in a different organisation in 2002-2003, when we first met, the market cap of India was not even a trillion dollar, $5 trillion we are staring at now.
Yes, I think we are blessed to be at this point of time in this country and to see so much progress around us. I think look at some of the other countries, all they have seen is stagnation. And here we are, I think, in the middle of a full-blown bull market. And we are seeing this kind of wealth being created in our country. I think we are privileged to that extent.
Do you track BHEL, I mean I always thought that world is moving from fossil to non-fossil, nobody wants to invest in thermal. But if I look at the order book of BHEL, it is at an all-time high. Markets are saying that the cycle of thermal power plant expansion will continue and BHEL would be a disproportionate beneficiary. Is there merit in thinking like that?
Yes, I think that it is very clear that both thermal and renewable will coexist for many-many decades, that is because there is a lot of volatility when it comes to renewable energy, whereas thermal does act as a backup.
And look, India’s electricity needs also are kind of moving up pretty decently at or around the GDP growth rates. We are seeing more urbanisation, increased use of appliances, data centres, higher industrial activity, and all of that is driving electricity demand which is why I think the country needs more and more thermal plants as well to support its ambitious renewable programme.
And, over the years the turbine capacities have remained pretty much flat. A lot of players who had come into India trying to set up similar power equipment companies, they are, I think, not in the same position and therefore BHEL is the obvious choice.
The Chinese imports also have come off significantly when it comes to setting up new thermal power plants. And a lot of the thermal capacity is coming in the PSU side as well, so that generally benefits a company like BHEL and I think earnings visibility is something which the Street likes a hell of a lot, which is why I think we are seeing that BHEL stock has moved up the way it has.
I think earnings will follow pretty much soon. If you see the entire trend of all these PSU capital goods manufacturing companies, be it in defence or railways or other engineering companies, it starts with a bulging order book position and then two-three years or less we see a significant increase in the top line, bottom line of these companies.
Wonder where you stand when it comes to the kind of AI growth that we have seen in cloud and what it means for IT services?
Yes, that is a tough one to answer because I was looking at the management commentary on AI in this entire earning season and I did not get completely convinced that AI is going to be a big wave for the IT sector. But then you look at the kind of order book position or the contracts that these IT companies have signed and that does give some amount of comfort that once execution starts to pick up, you will see very good numbers coming through.
And once tech spend starts to look up, then these are great operating leveraged businesses and you could see significant increases in top line, bottom line. So, it is a trend which we are watching very closely. Is it of the same size as Y2K or internet or remote application, remote infrastructure management, or application development that only time will tell.
But my gut feel is that next few, two-three years will be very good for the IT stocks per se. Valuations are reasonable. And look tech spends keep on going up year after year globally because of the way the structure is and these are I think structural increases in IT spends which benefit Indian IT companies.
And over the years, I think Indian IT companies have created a very-very strong position within their markets. And I do feel that if IT stocks, especially midcap IT stocks, if you can buy them at reasonable valuations, typically in that zone of 25-30 times trailing 12 months, then they could be good value creators going ahead.
I know you said one should go light into the markets, etc, at a time like this, but if I were to ask you a few top stock recommendations within the midcap universe, would you want to flag off anything?
No, I think let us just reserve this particular comment for the time being. As I said, I have been cautious for a while and markets have continued to rally. And I just want to wait and watch, let the earnings season also actually play out. There are a few interesting ideas. I like the numbers which came through from RateGain Technologies.
A very unique business model with a lot of annuity revenues also coming through so that is a company I am watching. Then, there is Mayur Uniquoters, very surprisingly good numbers coming through from that as well.
So, like that, there are a few midcap stocks that we are surprised on the positive side and at corrections we may be looking at these stocks more seriously and in positive light.
