What is happening with the IT sector? Just about every expert that we have been chatting with says that with this entire digitisation post-Covid, Indian IT companies will definitely benefit. Do you sense that there is a particular reason why we are seeing weakness within the IT basket and if so, should these declines be used to buy into some of these names?
As far as Indian IT goes, if you take a longer term trajectory, the sector has done very well over the last one year. While the market has corrected by 20-25%, stocks like TCS have been flat; so IT has done very well in this correction over the last three months. However, from the demand side, over the last two to four years, you saw demand coming in for Indian IT. The TCS revenue growth dollar three-four years back used to be 9-10% though they had been coming down to 5-6% from that point.
With the US being the biggest market for Indian IT companies, there will be some bit of demand contraction for them because we see a few retailers going bankrupt there because of low rates. Obviously BFSI as a space will have much lesser profits on that point; so they would spend slightly less in terms of discretionary IT spend. So you will see some bit of demand contraction on the overall IT side even though there could be some tailwind on the digital side. But the basket of revenue will come down for them also.
They have done well so far and I think people might be using this recent bounce back as a way to trim down some holdings within the portfolio. But overall, this sector remains like a 8-10% CAGR story over a medium- to long-term perspective because if you take the last five years’ profits, it has grown at 7-8% and multiples are at 20-22x for names like TCS. So I think they will continue to give that high single digit return for a longer term investor even though in the short term it may remain volatile depending on the sentiment and profit booking and other things.
What is your take on banks because on one hand while there may be some pent up demand, on the other hand, there is still a growing concern of rising delinquencies down the line. We may also see some of the impact of this lockdown being felt by financials for a quarter or two. What is your sense and what is your strategy in light of that?
Banks are leveraged entities and they are very closely linked to the economy. We have not seen a lockdown of two months in our history; so we do not know how the borrowers will behave and what will be the damage to the income of different customer segments. The only thing I can say is that just like they are very closely linked to the economy, so from that point, as and when the economic activities resume, that will be the trigger for financials to either do well or do badly. For example, at the end of the lockdown this month, we’ll have to see what are the restrictions put in place and what are the relaxations given to different industries. The moment different industries come to work and everyone starts going to work, financials will again come back and maybe the damage will not be as much to all companies within the financial space. But one has to be very careful what financials one owns within the portfolio because damage will be felt across. There will be some entities which might go bankrupt in this cycle; so it is always better to play the top three, four or five private banks within the space on an overall basis.
The other thing people are ignoring is that a large part of value for a lot of these private banks is coming from subsidiaries. For example, for an ICICI Bank or for Kotak Bank or SBI, a large part comes from subsidiaries like ICICI Prudential or a Lombard or an AMC and all those are very good entities and businesses. So the actual financial banks within these entities are trading at a much cheaper valuation from that point but because times are uncertain, they will only start performing when relaxations are given and as and when we see macro indicators do well. So indictors like power demand is just down 10% on a year-on-year basis. That is a very healthy and heartening number from that point.
We have seen cement demand operating at 50-60-70% and I am sure there will be some pent-up demand there but with the lockdown four ending, as and when relaxations are given and you see different data points emerging as to how these frequency data points are doing, people will get confidence that maybe things are not looking as bad. We have seen in the past that the economy has been much more resilient than what we thought upfront.
So let us see what happens but a lot of these high quality private banks look very attractive for a medium to long-term investment because people talk of moat and of franchise and I think this is the time when this moat and this underwriting standards and all those things will come in the picture. So franchises like Bajaj Finance or HDFC Bank or ICICI Bank will sail through this downturn and will be the survivors in a weak sector and we all know the survivors tend to make a lot of money when things are more conducive from that point. So we will be a buyer in a lot of these high quality private banks on an overall basis.
How has your portfolio changed between March and now? The world has changed and I am sure everybody has a different view of the world?
In terms of the total portfolio, obviously there has been a minor change. Look, one thing is sure; in quality, we have always followed quality, growth, longevity, price (QGLP) style in most of our portfolios and quality is something which we have always spoken about. At this juncture quality becomes all the more important and also how much cash you have on the balance sheet because that is one aspect which will differentiate a company which survives and the one that does well at the end of the tunnel.
So on an overall basis, there have been some tinkering changes; maybe a bit of pharma got added a couple of months back and there has been a slight tinkering in financials and minor tinkering of cement at current prices. So there has been a very minor tinkering all across but the character of the portfolio has not change on an overall basis because within financials also, we own mostly the bigger private banks and even though they have taken a knock, we are confident that they will again come back in some time; maybe as and when things become better.
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Bajaj Finance, HDFC Bank & ICICI Bank attractive bets from medium to long term perspective: Motilal Oswal AMC have 1352 words, post on economictimes.indiatimes.com at May 27, 2020. This is cached page on Talk Vietnam. If you want remove this page, please contact us.