The catch-up trade for PSU banks and the PSUs in general has a lot more legs and looking ripe for a strong value rally. What do you like among PSUs?
Look at it from the perspective that PSUs have been underperforming the market ever since the ETF investment became popular. We have had the government first pushing out its stake to ETF funds which in turn is churning it out into the market. A humongous amount of selling pressure can be expected.
Now that the government is talking about privatisation for most PSUs, except strategic sectors, it is hoped that such selling and liquidity pressures would no longer come to the market. As far as value creation by PSUs is concerned, that is a little suspect because not all listed PSUs are efficient. Some are past their prime when it comes to delivering better shareholder returns, despite being monopolistic in nature.
One has to pick the PSU stocks one by one and not necessarily go the whole hog. From a really long-term perspective, we would rather exercise caution and not advise one to go overboard on PSU stocks just because they are rallying on the government statement on privatisation. Privatisation would be good, but very often it would be better if that privatisation actually occurs for taking a serious view of that stock. Until and unless the privatisation move definitely goes through, we would be very cautious of the PSU space. For really long periods of time, most of them have not delivered value, not only from a shareholder perspective, but also value creation through EPS growth.
What is the outlook when it comes to the consumer durable sector?
We are expecting strong growth for consumer durables simply because of the effect of Covid last year. There will be the base effect of lower sales of last year over which we will see growth this year. Therefore, the growth will appear quite strong. Not just that, we also have certain macro data coming in that suggests that with interest rates being low and credit growth number being stronger, much of the uptake has been in consumer loans. Therefore, consumer durable companies are doing well.
Thirdly, the met department has predicted that we might expect a hotter summer this time around and that would mean good news for air conditioner manufacturers. So one can pick any company there. Better stick with the leaders and you will find that delivering a 20-30% growth in volume and value terms would not be so difficult. The only catch here is that some of these companies are exposed to the rally in commodity prices and that might have an impact on their margins. Otherwise consumer durables should be really doing well.
Even the companies on the kitchen appliances side can do potentially well. Electrical equipment makers, cable manufacturers can do potentially well and home improvement companies also are set to deliver well. All these sub-segments within the consumer durable sector are likely to do well because of stronger credit growth in consumer loans and the base effect playing out.
How will discretionary spend move? Should one look at hotel stocks, multiplex companies or for that matter even aviation? Now that private hospitals have also been allowed to vaccinate with a fee of Rs 250 per dosage, is this going to be a normal summer?
The relaxations from the lockdown started sometime during Q3 and my observation is that the lockdown does not really exist. People are moving out, people are spending quite a bit. The curtailed spending that we saw in Q1 last year, some of which spilled over into Q2 ,has now opened up in a big manner.
So discretionary spending has gone up quite substantially. Some part of that can be seen in the way automobile sales recovery has trended higher. From deep negative, automobile sales have grown to high positive numbers. That trend tells us that discretionary spends are up.
When it comes to specifically aviation or hospitality companies, we would rather be careful because many of these companies are not known to deliver value. We have to moderate the expectations for aviation companies. Fuel prices are up and the dollar is likely to appreciate and therefore impose a cost burden on aviation companies. Now is not the time for them to raise fares. It is very difficult for them to ask extra from an already underutilised capacity. So, I would rather remain cautious.
When it comes to the hospitality sector, something similar is happening. There are deep discounts available when you want to plan out your holidays from the hotel sector. But having said that, within the discretionary space, one would rather focus on those sectors which have traditionally given great deal of value to shareholders.
Consumer durable companies deliver value. Automobile companies have not rallied to the full extent. The way the numbers have shown that though commodity pressure is coming in, there is value to be had in the automobile companies and therefore associated auto ancillary companies should potentially do well.
We have not been great fans of the hospitality sector. There are very little stocks to choose from. When it comes to aviation, there is only one stock to look at which is IndiGo. When it comes to the cinema or exhibition kind of sector, it is PVR and there is nothing else to choose from. When the choices are limited, we exercise caution and not advise investors to get into such stocks but remain more into those companies where you can move from one to the other when you find that the performance of a peer is better than the one you have placed your bets on. That is not possible with say an Indigo or a PVR. So, we would not advise these stocks as investment bets.