The environment for metals is pretty strong and now that they have some decent allocation in the index, this will be the space to watch out for, says Manish Sonthalia, CIO-PMS, Motilal Oswal AMC. Edited excerpts:
On one side, people are buying cyclicals and industrials and on the other side Zomato and Paytm are planning to go public. What is the right way to look at it?
The new-age internet companies will have a place in the Indian market. Starting from this month, you have a flurry of IPOs coming for the next six months. Traditionally, the Indian market has not given too much of value to companies which do not generate profits. But I think new ways of valuation needs to be learnt, other than the traditional ways of valuation. Some of these businesses are very scalable in the long-term. They create value for customers. Delivery charges make Zomato a profitable model. Scalability in the long-term will determine how much excitement can these names generate in the future.
The valuations are pricy but traditional ways of doing valuations have to be done away with while valuing these companies. The new-age internet companies will also find a place in portfolios going forward.
When we spoke last time, you said you are buying industrials and cyclicals. Has that theme got endorsed looking at the way how the prices of steel, copper, sugar and cement has gone stronger?
We have not seen the capex cycle come back post the global financial crisis in any meaningful way. Thanks to the pandemic, the government impetus is now there on capital formation. Globally, governments and central banks are pumping liquidity into the system. Governments are spending a lot of money on infrastructure and private capex is going to follow. I think the true picture on the numbers will come to light only after a gap of 12 to 18 months. So it makes sense to buy ahead of the cycle playing out because the valuations are very benign looking at the next upcycle.
There is a lot of room for upside in these themes. I truly believe that capital formation will be the order of the day in the next two-three-four years. Rotation trade will play out. Consumer stocks, particularly staples, which have had their place in the sun post the global financial crisis are trading at very elevated valuations. This capital will move into either new-age internet companies or some of the industrials which are languishing.
Three years ago, your portfolio was dominated by HDFC Life, HDFC Bank, Eicher Motors, etc. Given where the earnings are headed, where would you place your bets now?
IT, pharmaceuticals, financials and, to some extent, consumer would be the four dominant themes in our portfolios. Within that, financials would be more a case of banks vis-à-vis NBFCs, thanks to the difference in valuations. NBFCs are trading at elevated valuations compared to the preceding years.
IT and pharma are clearly in a sweet spot. The demand traction and growth looks pretty good. Then there will be some place for even industrials, infrastructure and capex recovery plays.
Within Nifty, which are the two-three names you think are likely to surprise us?
Metals have gone up 2x-3x. The environment for metals is pretty strong and now that they have some decent allocation in the index, this will be the space to watch out for. Of course, the ESG angle comes through because these are polluting industries. Companies in the commodity space, specifically in chemicals or metals, which have a good ESG score can surprise on the upside.
Plus, we have some of these large unicorns — the new-age internet companies — which will be starting at valuations of over a billion dollars. They will definitely come into the index at some point of time. They have the propensity to surprise us on the upside or on the downside, depending on the scalability of their model. So I think these are two spaces which will clearly surprise on the upside.
LIC, when it comes into the index, will be a no-show given the fact that there is a value migration happening from public to private insurance companies.