Is this move in the last two days of the week believable? Nothing has really changed – whether it’s because of inflation, or crude oil prices, or something else. But the market rebounded.
When we talk about it being believable, I just think the market has been trending in a range. The market dropped a few times around 15800 and saw a bounce and then again, some bad news may come and then slide. I just think we are in a range and will trade, intermittently, within that range.
We’ll see these kinds of rallies, but by and large, at least for the next couple of months, we’ll probably be here. We don’t really see things moving significantly outside this range. The good part is that 15800 seems to us to be looking good for the market at the moment. Therefore, it now appears that the downside is definite in the absence of any bigger bad news that could come.
It seems that brokerages are very optimistic about stocks. CLSA has a buy rating, JPMorgan is overweight, and they say there are headwinds in the near term but leverage is unlikely to rise and the valuations offer an attractive return on risk. What is your stance when it comes to Hindalco?
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We’re not really talking about specific stocks, but in terms of the results of some of these aluminum companies that have come in over the past few days, I think the strong aluminum prices have helped these companies the most in the sector to be able to withstand the pressures of raw materials. In that sense, the demand scenario is very strong at the moment and I think these companies will do well in the shorter term over the next six months. We generally avoid any cycle-like commodity in our portfolio because our strategy is essentially to invest more in long-term companies with a vision for long-term growth and commodities per se are very volatile and ill-qualified there. However, I think the outlook for the aluminum package looks good at least in the short term.
High inflation has become a sticky topic for many companies. Now the Reserve Bank is going ahead with its revision of inflation expectations upwards in June. This is clearly an indication that this is still a huge problem. In light of this, how do you view the problem of high inflation of raw materials in particular for the entire consumption basket?
We are seeing the effect of inflation playing its part. In the case of industrial companies, margins have been squeezed this quarter.
When it comes to consumption, it is a flow through effect that will play itself out as well. I just think the consumption of luxuries will not be affected. We’ve seen that in the past, too. The effect of inflation is shown at the bottom of the pyramid. So mass consumption-oriented items from FMCG companies will see a greater impact.
There will also be some impact on manufacturers of electronic aging consumers. But I think in the whole consumption basket the higher end or big ticket items will see much less or almost no effect and you will notice small absolute ticket items in consumption like movie tickets for example have an effect. Even during 2018-2019, we are entering this kind of region where we will see consumption come under constant pressure.
What do you think of the numbers from as well as the news that Nader Godrej has been reappointed as Chairman and Managing Director? The stock has been very lively in today’s trading session.
Godrej Industries is a diversified company, with many lots. She’s got the farming basket inside, she’s got possession of property and so on and so forth. But we haven’t seen the full impact of the slowdown in consumption that is likely to be on the anvil at the moment. But I think we’ll see that more in FMCG players and not so much in Godrej Industries.
Objectively speaking, is there something you are looking for or are you just a completely specific stock in this market?
I think you have to be very specific about stocks as far as this market is concerned. Once again we get to that point where individual companies will be their strength. But if I had to look at one sector that should do well, it would be the financial sector, and more specifically banks.
Credit growth and return to bank capitalization are going very well. Their deposits have skyrocketed and we are seeing an increase in interest rates. We will see an increase in profit margins as the first phase takes place and there are no burdens on the balance sheets. The financial sector is one that we think is in a good position. Also, do not forget that when inflation and commodity prices rise, business needs increase, and that is supposed to benefit the demand for credit. The financial statements were sold massively. Reviews are starting to look very attractive too.
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