Make sense of the madness that spooked the market on Wednesday rather than on Friday. Was it only about the Adani Group and the domino effect it had on the market?
It could be a combination. For the last one month or so now, India has been underperforming. Whenever we see the Indian market underperforming related to China or the US, the hot money or the ETF money or passive fund money moves out. We have seen that pressure for nearly a month and with that background, this event also got triggered and added fuel to the fire.
That is the way it was more of an event which was unfolding and the background was weak. The conviction has improved. Generally closer to budgets, people are slightly nervous. It is a combination which played out rather than saying just one specific thing which played out; obviously that got triggered and that is the way we look at these markets.
You have had exposure in some of the Adani Group names as an investor. Given that the concerns have been raised, are you worried or you think they would be addressed?
I always say what is reality and what is narrative. Market is very different. I have seen these things many times in the past. Even some of the largest corporate houses and something similar has unfolded in the last many years.
One business rivalry and the other aspect is that we do not get into any of these narratives. Our focus is pure numbers whether we bought these stocks at the right price and whether we sell these stocks at the right price. That is the way we define it. We had some exposure in the past in some of the names. We have pruned down some of the names virtually at the top of the cycle and some names we still own. These are the India centric infrastructure themes which we believe should play out very well and it is very unfair to say that we do not want to participate.
We have seen this narrative for many times and we are not that disturbed. This is part of this business. Sometimes people tend to overreact. But as long as we have clarity and conviction, we are buying or holding on to good names. We are not that upset or worried about it.
If the FPO goes through, do you think markets will be happy and relieved and that technical factor is over or that is something which markets are not bothered about?
No, it is definitely a sentiment thing. Right now, the uncertainties are all about whether the issue will sail through or not. Once it sailed through, that event will be behind us and again good, cash flow-based companies should do very well where valuations are right or all those names should come back. So the event is important and it is also unfolding closer to the Budget. Technically we call the Budget a non-event but when it unfolds, people are generally cautious and worried about it.
There are two scenarios for the Budget – a change in the tax rate for long term and short term. Scenario two is no change in tax rate but the duration is changed. So, long term which is one year, becomes two or is equated to other asset classes which is three. What could be the market reaction in scenario number one and scenario number two?
In the case of scenario number one, when they hike the taxes or with that background market can be spooked and for a few trading sessions, it can correct a bit further from where we are at current level.
But in scenario number two, where they only extend the tenure, that could be a temporary setback and the market will come back.
But the market has already corrected. So let us look at the background of the Budget now and assume something unwarranted builds in the prices or builds in the event form. However, the market is very light, leverage position has been pruned down and people are sitting on a reasonably good amount of cash. The perception is very negative. India has seen relatively significant underperformance in the last month. So a background is there where the dent should not be very meaningful because if we are getting into a Budget with this sort of shock and if we have a very high leverage position and everybody is in a euphoric mood, then the dent could be very meaningful but the background is very different.
So the market is relatively light. If we look at the Quant Fear Index, in the last two or three days, when this fall unfolded in a big way, it did not spike up to that extent to say reversal. It can settle down in the next few trading sessions. We are closer to that event okay which means the downside may not be very significant from the current levels.
The PSU banks had a pretty stellar CY2022 with nearly 70% runup. Do you think this is likely to continue or are the haydays for some of those PSU banks behind us?
I always maintain that value as a theme is still in the very early stages. Now when value has outperformed significantly and we are seeing a small correction happening there, I always believe that no move should be very linear. Given the background which we are looking at, the value thesis will outperform.
In that background, PSU banks will continue to outperform in both medium and longer-term perspective. But I would like to avoid all the stocks where FII ownership is on a higher side, given that Indian underperformance has been apparent from November onwards. India has potential to underperform China, Indonesia and now it is even the US. In that background, there might be pressure on the FIIs perspective from the outflow perspective, passive funds play out.
I will use additional data points in terms of FII ownership. Any sector or stocks with very skewed FII ownership, should be avoided or one should have less exposure. But given the under-ownership of PSU banks, that is within the domestic market, FIIs hardly own any of them. Leaving out the top one or two names. I do not think FIIs really own PSU banks. That way, the space is quite good. The FIIs presence is not there and so unwarranted pressure which can get built into the outflow from the passive fund perspective is lower in PSU banks.
Do you like banking stocks particularly if there is low FII ownership? Why do you own HDFC Bank? We have started to see the elephant begin to dance as well.
We have recently built this exposure. Our fact sheet shows we actually exited from ICICIC Bank in September 2022 and shifted towards HDFC Bank. The reason was very simple; ICICIC Bank was trading in the most admired territory and HDFC relative, having hit the neglected zone. So it was a good trade which worked out very well and I still believe that we have seen extreme negativity in HDFC Bank and it is set for a better outperformance over other private sector banks. That is one of the reasons we own HDFC Bank.
