Among the top four IT names, TCS has a PE multiple of 25-26 times, Infosys north of 20, Tech Mahindra, Wipro are in the late teens. If one looks at the assumptions for FY22 once the base effect fades away, you could say tech companies at best would grow in early double digits. Can these PEs be justified?
At this stage, it is justified because there is a large portion of the index where people want to be underweight. Earlier they were all overweight on financials which is almost 40% of the benchmark and almost everyone was either neutral or overweight financials. Post March, this is the one sector which has significantly underperformed and there has been reallocation of capital from financials to the other parts of the index. Tech and pharma have benefitted and maybe consumer discretionaries also to some extent.
Coming specifically to technology, the last time we saw such multiples for technology was back sometime in 2010-11 and maybe going into 2012 when we were coming out of the Lehman crisis. Their growth rates were north of 20%. TCS in 2011 grew at almost 25% in terms of revenue growth and in my recent interaction with all the tech companies, one of the questions I asked is are you seeing any similarity with what happened in the 2010-2014 period when the Indian tech companies last saw north of 15% average growth rate?
The data is not suggesting that they are seeing such growth, maybe the growth rate improved by 200 bps or 300 bps but it is not suggesting that they are anyway close to where we were in that period. So my view is they are slightly on the overvalued territory and I will be very careful in chasing these stocks from here on.
For those who have bought into the whole proposition of sasta, sundar, tikaoo, which is buy stocks which are cheap, buy businesses which are here to stay and one day somebody will recognise them, It includes NPTC, cement companies, steel companies, value names like PSUs all of them are just feeling left out and their portfolios are bleeding. “When will value investing come back?
I am not a big fan of value investing and especially when it comes to PSUs. That is a value trap and we have seen this time and again. So I do not see any merit in going into this. The only thing that could change this PSU valuation value trap is if the government successfully privatises either BPCL or Container Corporation or Air India and then we could see a rerating. I know there is a lot of talk right now and processes are going on but the market currently is still in the denial mode that this is not going to happen or it may get delayed.
We would also want to see at what price some of these divestments happen. But otherwise, these companies have actually destroyed wealth. Even though they generate a lot of cash in many of the businesses I do not think the cash really is utilised in the most optimal manner which is beneficial to shareholders. I guess the stock prices today reflect the disappointment of how these companies have behaved over the last 10 years and the entire PSU basket excluding the banks has only a market cap of Rs 8 lakh crore. This includes the ONGCs and IOCs of the world.
So I think that number is quite shocking that the entire PSU basket has come down to such a level. I think it is a value trap and I would stay away. The only trigger for this is the privatisation as and when it happens, even then only the ones which the government will privatise will have some play the others will continue to languish barring once in a while they will move up. So I would say this whole value play is a very tough game to play and I would generally avoid it.
There’s a lot of buzz about the new listings. Anything within that space that has caught your eye?
Actually for many of these companies which have got listed, there are reasonable peers available in the listed space which are trading at much better valuations. I do not see any reason to chase any of these newer listings. There seems to be some sort of a scarcity premium right now where some of these companies are getting and we really do not have enough data to suggest or to prove their credibility whereas in many of the listed companies we do have more data.
So I would not be chasing these new listings. We have seen this happen in the past. As the data is not supportive, we see disappointments come in and so I would rather go with the tried and tested ones where we have more data. We have institutional memory of how the managements have behaved over good times and bad times. I would not jump in if the valuations are not supportive.
When it comes to the earnings season, are there any particular sectors that you think will see outperformance or weakness?
Agri is one of the space where we will see some positive, consumer discretionary which is autos will see good numbers because we are seeing some of those numbers already come through as we get the monthly data but a lot of it could also be because of the festive season. The inventory pipeline is getting filled but broadly speaking, the market has moved beyond earnings because everybody is looking at earnings for 2021-2022 and I do not think anybody is focussed on what happens to the current year earnings.
The market has a free run. We may want to focus on earnings here and there but I do not think people make too much of a difference unless the commentary for the next year is not that optimistic. Broadly the markets will ignore good and bad. Maybe the ones coming out with good results will get some more appreciation but it is my broad view that the market has a free run for three more quarters and it is only the earnings of 2021-2022 which is relevant as far as some serious movements either way is concerned.