March a washout, look for a pre-election rally in Apr

Deven Choksey, MD, DRChoksey FinServ Pvt. Ltd, says “March is going to be a washout month as one has also seen in the last 10-12 years. Probably the recovery can happen with a pre-election rally somewhere in the end of March or beginning of April.”

There is a view emerging that this sideways correction may not lead to a massive price damage in the midcaps from here on, 15%, 20%, 25%, 30%, 40% whatever has happened, has happened but runaway rally may not resume anytime soon. How are you approaching the midcap end of the market for your clients? Have you started cherry picking or not yet?

Deven Choksey: I think most of the companies where you are seeing the price damage, that is happening largely due to the midcap, smallcap saga which the market is victimizing. In my view, this correction had to happen and has happened in some form or the other. The reason can be anything, but this correction had to happen. In a way, it is a good correction, though it is resulting in significant losses for many of the traders who bought in the midcap, smallcaps on the basis of liquidity-based push that the market was experiencing.

Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
Indian School of Business ISB Chief Digital Officer Visit
Indian School of Business ISB Chief Technology Officer Visit
IIM Kozhikode IIMK Chief Product Officer Programme Visit

Currently, among the frontline stocks also, some of the stocks are showing negative performance and that is where I feel more comfortable buying into because due to their fundamental strength, these stocks have become buy opportunities in the current market. So, yes, you are absolutely right this is a time when we probably look at the companies individually and start adding them into the portfolio, particularly some of the frontline companies with a view that this price correction would probably get squared up at some point of time before the pre-election rally starts.

So, maybe March is going to be a washout month as one has also seen in the last 10-12 years. Probably the recovery can happen with a pre-election rally somewhere in the end March or beginning April.

There would be a pre-election rally this time but election results are mostly factored in, right?

Deven Choksey: That is true. Pre-election rally also would be a symbolic rally in my view point. But more importantly, given the kind of strength that the government is demonstrating in pushing forward all the reforms whether be in election or after election, the business continues with a great speed. So, those companies which have been receiving the larger orders, they have visibility for execution. Those entities which are receiving money in their hand, have a larger ability to spend money and that is where consumption-based argument would come forward.

In my viewpoint, even if we name it as a pre-election rally, it is still okay. I believe that overall the performance of the market will probably show a reasonably good track going forward and some of the largecap companies, if they get corrected on price and valuation, may provide the first opportunity to buy into the portfolio going forward.

Just back to your largecap preferences. Which sector is it that you are looking at and finding value?

Deven Choksey: The correction in the banking and financial space is first and foremost a very healthy correction. Though some of the banking financial names have started picking up today, I still believe that you have an opportunity around the likes of Bajaj twins where the valuations are becoming more attractive with every fall in the price. These companies probably will remain at the top rung of the ladder as far as the outlook and the promises are concerned on their business front. So that is one area where in one such company or group of companies we could find a meaningful entry.

Similarly, we find more meaningful entry into auto ancillary companies because of the higher amount of discretionary spending in the OEM segment, the auto segment. We believe that the next in queue would be the ancillary companies which would probably be demanding further re-rating or corrected valuations which have already happened in the last two years. They may get re-rated from here on and we like that particular space as well.

We continue to like the capital goods segment per se; however, the valuations are still at peak. So, maybe in some corrective downside, if at all in future, one gets an opportunity that would be also equally an interesting one to consider into. So, yes, selective pockets are where we have selectively started to add into the portfolio some of the quality names for the long-term investment purpose.

Recently, the Adani Group has given out a massive capex plan in their airport division and overall about Rs 10 lakh crore worth of capex plan. They have shared the group EBITDA targets. If one were to play one particular stock from this group because there are half-a-dozen listed, which one would you be most comfortable getting into for the five-year ahead?

Deven Choksey: It would be Adani Enterprises because of the incubation that they have been doing of different businesses – be it the road business or the airport business. The renewable business is also being incubated. They are also coming up with various other businesses like the data centre business which is being incubated.

So, each of these businesses which are currently being incubated into the portfolio of Adani Enterprise, I believe at some point of time, would become ready for their market journey and thus they would probably get demerged from the Adani Enterprises and get separately listed, that is where you are likely to see the valuation unlocking taking place in these companies.

So, if you are looking at typically two years and thereafter period, these these companies within the Adani Enterprises could possibly start showing the better amount of realisation for investors. Otherwise, the existing portfolio of companies be it in the port or utility segment, all suggest continued gain on the existing capacity as well as the inorganic growth approach that they have been cultivating. We prefer a selective approach for the long term in the port business which would probably yield better results for investors.

What about some of these proxy plays that you could say coming in real estate, infra? Do you find Kajaria, Somany or any of these other tile companies interesting?

Deven Choksey: The entire building materials segment would remain absolutely strong going forward as well because on one side you are seeing a continuous construction activity happening be it in the residential space or industrial space or even for that matter infrastructure space. So, all in all, the construction activity or construction boom which will continue in this country not only for the next 5-10 years but for the next 25-50 years, we are likely to see this kind of construction activity continuing in this country.

Given that situation, some of the material players who are typical catalysts for this kind of a growth phase, will have relatively good time. Maybe one will have to buy some of these companies when the market gives a correction. At this point of time, that market has probably run up little ahead of time, giving a valuation which is equally steeper in some of the cases, where we probably believe that we will have to wait for a while before buying into.

Those who are basically choosing an option or a proxy for their fixed deposits, for them the housing finance business could be really a good one to get into because that is an area where you are likely to see a continued growth of around 20% on CAGR basis for next three to five years, at least in the near term.

What about QSR stocks like Jubilant, Westlife, Devyani, Sapphire? Anything interesting in that pack or should one wait for a good pickup in the consumption story?

Deven Choksey: We remain bullish about the entire consumption story and in particular, the QSR is definitely one which we would like to keep an eye on. However, the market is probably running up much ahead of its time and giving a far superior valuation premium to many of these companies. In my view, unless we learn the discipline of buying something at an attractive valuation or a sustainable valuation, we would be paying a significantly high amount of premium which may not work well for the portfolio returns. So, from that perspective, we will have to wait and see before we get some price correction. At this point of time, I still believe many of these companies are still at a premium valuation, which probably needs to get slightly corrected and then probably one could look into them.

We are seeing a big comeback by the entire commodity basket, be it metals, ferrous, non-ferrous; be it agri commodities, across the board. Any sensitive commodity play, either on the positive side or the negative that you think is of a good look right now?

Deven Choksey: If you are planning to ride the bull cycle in the commodity, probably it should be metals. In my understanding, the metals probably would give the first leg of a strong rally, a sustainable rally for next few years. The reason is probably simple. On one side, the world is investing heavily into renewable alternatives and as a result of which the first level of requirement come on to the ferrous, non-ferrous metals, that is where probably we are likely to see the higher amount of demand, a generation happening from the globe.

On the other hand, the crude oil prices by and large are likely to remain in a safe zone, as I may want to call it as. So that may probably keep the cost of energy under control. At the same time, the green hydrogen use in the production of energy for most of the metal companies would end up bringing down the cost of production for metal companies which is structurally very positive because that should help them eventually in getting the better price realisation and save them from the vulnerables of the crude oil prices to a greater extent.

These are some of the structural changes which we are observing in this entire space and that is where we believe that along with demand generation, the cost rationalisation factor is likely to help the metal commodity companies. Maybe the China factor will have to be closely watched here as far as the dumping is concerned, but overall we believe that the metal should have a relatively steady domain going forward from here on.

William Murphy

Related post