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    Challenging times ahead for IT cos; not overweight for next 1-2 years: Quantum Securities

    Synopsis

    ‘Ensure that you get into the FMCG stocks at the right time’

    Sanjay Dutt, Quantum Securities-1200ETMarkets.com
    You need to now identify stocks to get your levels correct. Look at sectors which will rebound the fastest
    Rural demand alone cannot compensate for decimation of FMCG companies, says Sanjay Dutt, Director.

    I can divide the world into two. There are optimists who believe that whatever could go wrong has gone wrong. Things from here will only improve and they will only get better. That is one part of the market. Second are the pessimists who believe that it is only liquidity and it is only central bank policy action which is fuelling asset price higher and buyers should be beware. Which part of the camp are you in?
    I think there is a grey area in between also. So I always slip out and take the easier way out and I am not willing to stick my neck out at this point of time. I think there is an opportunity in the market but at the same time there is a lot of worry because you are seeing some of the lowest quality names across the world including the US and the emerging markets starting to rally. There are penny stocks which have started hitting the circuit every day. Liquidity is something which you cannot really control. It just flows and the biggest problem is that people get sucked in.

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    I am trying to be a little more specific to your question. I think I am optimistic but I am not optimistic on the market as a whole. I think it is a market of individual stocks that is focused on bottom up. You need to figure out that the worst probably is over. You would not go back to the 7,500-8,000 levels of the Nifty. Therefore you need to now identify stocks to get your levels correct. Look at sectors which will rebound the fastest, which will be least impacted because of Covid and at the same time will take the maximum advantage of liquidity and low cost of funds.

    So the theme is going to be the companies that will survive this FY21 onslaught, Covid, etc, and who will be able to stay afloat. Those are the companies which will actually participate in the recovery now; whether it is V-shaped or U-shaped none of us have a clue at this point of time. But as investors, someone like me who would stay put for two-three-five years, you need to get your companies correct and understand that these companies will survive the carnage. Therefore, I am an optimist. I am looking for opportunities but opportunities at the right price. I am not in the camp where I think fear of missing out or the FOMO thing works because you always get your prices. You just need to be patient and keep adding and keep your powder dry.

    Investing is about allocating future capital to benefit from trends that would emerge. If the future is so uncertain, how does one position capital right now?
    The future is definitely uncertain but at the same time it does not mean that business activity, commercial activity or companies will shut down. We will still need equipment. We will still need capital goods. Investment cycle will come back; probably it will come back a year or two later. We have got this big theme. We are working around the world where people do not want to concentrate on China or concentrate on a particular physical or geographic location. So definitely, India will benefit from that. Within India, the government is clear that they want to increase manufacturing, increase focus on industries which can give more jobs, and localise as much as possible.

    Now these kinds of themes are not going to get impacted when the future is uncertain. Yes, I will have to live with two-three-four quarters. Very clearly some of the more mature companies have come out and said that whatever one might say about green shoots, it is a little too early to say anything, which basically implies that FY21 is washed out until and unless we have some more negative news on the Covid front or something that may get extended. But I think the focus needs to be on companies which will survive and the companies which are positioned to ride the domestic wave, particularly the domestic consumption and domestic inputs wave.

    IT earnings will kick off this week with TCS. We are not expecting an extreme impact but nonetheless there is likely to be some tapering when it comes to those numbers. What do you think?
    I do not think TCS or technology companies, particularly larger technology companies, would come out unscathed. They would have to deal with margin pressure. They would have to deal with cost cutting that we are seeing across the world. There would be uncertainty on that front. I do not think this quarter results of TCS would be indicative but what is important is to get an honest commentary of the management as to where do they see their customers, the trends ahead in the technology business and particularly in their space of business.

    But in my own opinion, I do not think technology is a place to be overweight for the next year or two because it is going to go through some challenging times both in terms of margin pressures as well as in terms of growth ahead.

    We have been talking so much about the rural recovery; how sales particularly on the back of demand in those segments have been picking up across the board, whether it be for segments like tractors or two wheelers in the auto space or FMCG and staples. Companies like Parle are saying they see no signs of slowing down but others in the same space are talking about how there is likely to be a speed bump going ahead. There are question marks about whether this is sustainable or whether the rural recovery can really compensate for the slower growth we are seeing in urban areas. What is your view?
    I am very clear. I think nobody has a clue for the next four quarters. What you have seen now is quite a bit of the pent-up demand of two to three months that is playing out but to take a definite call as to what is going to happen over the next three quarters till March 21, it is a mug’s game; no one is going to get it right. Even the company management, particularly the mature, honest, clear and transparent management, have said very clearly. We just heard from Nestle the other day. He himself was not too clear as to where things are headed even though a substantial portion of the revenue would be coming from the rural market.

    Similarly I do not think the rural market will be able to compensate. The jury is out on that. Uncertainty at this point of time is too high in the country because one day you have a particular region working and the other day you have a region which suddenly has a massive outbreak and goes into lockdown or goes into some kind of isolation. So obviously demand is going to be impacted. We must all accept the fact that these three-four quarters are a wash out. Therefore, we need to get into companies in which we can take a longer term call. FMCG is here to stay. You need to just ensure that you get in at the right time and are not getting in when 20% or 30% liquidity-led run up has already pushed up the prices. So get your levels correct. I do not think in the next three-four quarters, the rural demand will compensate for the decimation we have seen across businesses.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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