Wait times for auto companies have increased quite a bit. There have been rumors of increased discounts, etc. Both JPMorgan and Citi have downgraded the auto sector, saying that most of the positive exits are priced in. What is your opinion on autos right now? Is there a particular name you would still recommend buying?
Sandip Sabharwal: It would be too early to write off the auto sector just because it has performed quite well during a period of subdued consumer demand. Consumer demand may improve in the future with the onset of the festival season. The rural economy is recovering thanks to government cash infusion and normal monsoon rains. Interest rates overall have peaked but are not likely to come down anytime soon. Inventory build-up is being corrected and most auto companies have targeted to correct it before the start of the festival season. Input costs continue to be favourable for the sector and this is a very positive sign because we all know that steel prices are at multi-year lows and steel is the biggest cost factor for auto companies. So all in all, the sector is in a phase of consolidation but the longer term outlook remains good.
Among four-wheelers, Maruti and M&M are likely to do well in the long term. Two-wheelers seem to be facing some growth issues in the short term after a significant improvement in sales. But in the long term, it should be OK. However, valuations are a bit high. Bajaj Auto is the best company there, but not at these valuations and revisions.
Have you changed your mind about Ola? Its value has doubled after the IPO and listing.
Sandip Sabharwal: In the short term, it’s all about liquidity. How many people want to buy compared to the number of people who want to sell? The stock was expensive when it went public. Now it’s even more expensive. That perspective can’t change.The other side of the coin is the consumer goods sector and in particular the consumer goods sector as a whole. How is the market betting on a recovery? Has it moved beyond tactical trading? Do you think there might be a significant benefit now to exit some of the successful sectors and focus on the consumer goods sector?
Sandip Sabharwal: FMCG is a good sector. But these stocks are not going to give 50-60% returns. It has always been a sector of stable returns. So if the demand recovery continues and input costs continue to be cheap, for example palm oil prices are near the year low instead of being high, many of these companies will benefit.
Many other companies have also indicated that they are not impacted by input cost pressures. So I think it will be a stable earnings sector. But at current valuations where everything, even cyclical companies, are trading much higher than the valuations of stable growth consumer companies, it makes sense to invest some of it. But you can’t invest a large portion of your portfolio in it. Appropriate allocation makes sense.
Add more to PVR at these levels or avoid?
Sandip Sabharwal: The exhibition space is in a situation where most people assume that box office revenues will never increase again and the assumption that films will continue to flop has become the base case scenario. However, the reality is somewhere in between because there was a prolonged period where box office revenues were not good. Globally, we have also seen many films that have been very successful and have made record-breaking revenues. So there seems to be some sort of revival. The reality is somewhere in between.
I would argue that PVR-Inox is undervalued at current prices. Cyclically, things are expected to never improve, whereas I think things will improve. So it may not be a rosy scenario where everything goes very well, but the stock has more negatives than positives at these prices, so there should be some upside.A review of the channels in the automotive sector shows that it is no longer a seller’s market but a buyer’s market – be it in terms of availability, price or delivery. Do you think it makes sense in the short term to reduce exposure to the automotive sector somewhat?
Sandip Sabharwal: If you’re overinvested, say you have a large portion of your portfolio in autos, then maybe yes, but as we’ve discussed, at the start of a potential consumer recovery cycle, we can’t assume that the auto sector isn’t going to do well. Most auto companies are talking about low single-digit growth right now, etc., so I think a lot of those things are priced in. Stocks have pulled back a bit from their highs, but I think the longer-term outlook remains good, and the one good thing about that is that there’s very little pressure on input costs, which is helping those companies.