“Overall, this market has to be played in the form of select stories where there is very strong earnings and high quality of management and no controversies. We would prefer larger caps compared to the small caps but there could be exceptions,” says Jigar Shah, CEO, Kim Eng Securities India.
The early indications from the third quarter updates from various companies are quite mixed. Marico says rural demand is sluggish but M&M Financials’ numbers are good. Banking sparks off positivity. What is your observation?
In the third quarter, we expect IT and telecom to be very robust, given the very strong visibility in terms of price increases, especially for telcos and a lot of deal wins for IT. There is also indication from the data on the core sector IIP that cement has not done as well and late rains have not been good as a lot of the agri related or even consumer related sectors are getting affected in the rural areas. So it is a mixed bag.
Auto sales data suggests that barring a few players who have done very well, a decline is factored into two-wheelers and tractors and the high base effect is catching up. There is also going to be a good amount of pressure compared to a year ago, in terms of the commodity prices, which will weigh the earnings for a lot of companies. So the base effect is there. The commodity price inflation is there.
Overall, it is not looking that good. From here, it is more about separating who is going to do better on a consistent basis from the year ago scenario where everybody was just emerging from the Covid and Covid effect and growth was looking good for everyone in the first two quarters of this financial year.
What is the strategy Kim Eng is formulating for the rest of the year as far as Indian equities are concerned?
We feel that the market is slightly above its fair value and there is a scope for decline, especially if the third wave intensifies and takes everybody by negative surprise. So that is one aspect. The other aspect is that an increase in interest rate is a foregone conclusion in 2022. It is going to happen and liquidity tightening will also happen. That would in general increase the interest cost. To some extent, the interest of the investors also could divert a bit to fixed income if the returns are slightly better than what they were in the past couple of years.
Overall, this market has to be played in the form of select stories where there is very strong earnings and high quality of management and no controversies. We would prefer larger caps compared to the small caps but there could be exceptions.
The other theme is that anything to do with sustainability/ESG, the circular economy, recycling, a lot of these stories and renewables would be doing really well because that is where the world is moving towards and there are a lot of plays on that within existing companies. New innovative business models are also coming up. We would look at all of these opportunities but if I have to summarise some of our key themes and stock picks for 2022, it is software services, telecom and tractors.
Within software, we prefer Wipro and Tech Mahindra. Within telecom we like Bharti Airtel, Indus Towers and Sterlite Technologies. Within tractors, we like both Mahindra and Escorts. We also like selectively some of the stocks where the export and speciality component is doing extremely well such as Phillips Carbon Black and the private banks are looking good. They would continue to do better on account of superior capital adequacy and asset quality compared to the peers and weakening of the NBFC should benefit them. So there are these pockets of opportunities. Then there are a whole host of other opportunities in ESG themes as well.

There is an expectation building in the market that the Budget could be focussing a lot on infra capex because there is room now. What are your thoughts on it? What are the areas the government may focus on as withdrawal of farm reforms was a bit of a sentiment dampener?
My opinion is that we are still going to be at about 6.5% to 6.6% of fiscal deficit to GDP for FY22 and a lot depends on how the stake sale in state owned units goes through. So there is much headroom to spend. Eventually, in the medium term, by ‘24-25, we need to come back to 3.5% to 4% of the fiscal deficit to GDP. In that situation, how is the government going to spend so much on infrastructure? I think it has to be driven by the private sector and the whole reduction in the corporate tax was an initiative where that amount of money could get channelized into capex.

A lot of policy initiatives in this direction have been taken up. That should be the way to go about it and the Budget ideally should be able to reduce some of the personal taxes which are still high. That would be a very positive factor and that would be something to look forward to in the Budget.
What are your thoughts on the small and midcap universe that got corrected nicely? Do you see a case of looking for value over there or do you think 2022 may not be a great kind of year for midcaps and smallcaps?
If I have to give a very general view, I feel slightly more safe on the largecaps but at the same time, there are some very good, very well managed companies in the small and midcaps space and once they get corrected, they become more attractive.
There are good pockets of opportunities when companies like PVR or Inox get corrected or when some of the auto ancillaries or companies like Phillips Carbon Black corrected. So there is opportunity in good, well managed companies. There are some pharma companies which have corrected and they are still quoting at about 25-30% lower from their highs and there is a good potential in the medium term and opportunities within the small, midcaps and those areas.