Essentially, from the March lows, Nifty moved up 20% and the midcap indices moved up nearly 35%. So, after such sharp moves, corrections are imminent. Now, what will create the correction? Different things create corrections. Sometimes it is global factors like crude spikes. So, reasons come for the correction and that happens. In the global context, we have outperformed significantly.
So, although we might have corrected 3-4%, that is one of the lowest falls from the top for any major market. If you see the European markets, most are down 8% to 10% and US markets are down 6% to 8%. Stocks in China are languishing near multi-month lows. We have done relatively better and that leaves the scope for some additional correction. I am not looking at a very deep drawdown, but a 19,000 market should be a base case at which we can start nibbling in and if the global weakness becomes more accentuated, we could also fall somewhat more.
Emotional factors aside, for the sector and the stocks, it seems like there is more negative news than positive, at least on the crude front, as well as raw materials.
The bigger concern is for paints companies. Normally it is an oligopolistic kind of industry. They should be able to pass on price hikes, etc. But this time, the entire spike in raw material prices is coming at a time when Grasim is making a huge entry into this segment and to that extent, they will not have pricing power.
So, what will happen is that on one side, competitive intensity is increasing; second, we are getting hit by higher raw material prices and on top of that we are unable to increase prices as Grasim will try to make aggressive entry and take away decent market share because they have invested so much. So, it is a perfect storm and the writing has been on the wall for some time for the paints industry.
So, many of these companies will again become a buy at some stage. When, it is tough to predict, but maybe a year from now. So, I will not be looking at paint stocks at least for a year or if these stocks actually end up falling 20% earlier than that and at that time we can re-evaluate.
That moment where capital allocation was set right at M&M and it rallied from Rs 700 to Rs 1500. Is there a kind of a new light by which Street is looking at L&T now?
They should because, it is the largest EPC construction infra company of India. It has been making inroads into new segments and gaining significant orders from overseas also and it is today sitting on a huge order book, a relatively very strong balance sheet, I would say, much stronger than it has ever been and it does not have debt issues at all and out of the asset ownership business where many companies have got trapped into BOT, etc, and it is an underappreciated stock.
So, even at these highs, if you look at fund portfolios, you will see that relative ownership of L&T has gone up but still most top largecap funds are dominated by HDFC Bank, ICICI Bank, Infosys, TCS and ITC. That is how the top holdings go while the best performance sector actually is capital goods. I would think that if the markets weaken significantly, L&T will also correct. That will make people who have not allocated, allocate, in our largecap portfolio this is the biggest holding.
