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    Why commodities and media are Emam Holding's favourite contra plays

    Synopsis

    The media space is looking much better than the multiplex space and we are quite bullish on media in general.

    Sridhar Sivaram-1200ETMarkets.com
    I like gold and silver also but there are not too many plays in India for that but commodities in general as a space as a contra play we think is very exciting, says Sridhar Sivaram, Investment Director.

    We can divide the market into two camps -- those who are participating and those who are not participating. The first group is happy. The second group is feeling terrible and left out. What should one do?
    Some bit of caution is required because the markets have run up very fast. I was looking at the data for the last 10 years for Nifty because we keep hearing that markets always do not need earnings. There are momentums. There is liquidity. Just look at the last 10-year numbers and Nifty was 5500 ten years back. We are at roughly 11,000 plus/minus a few hundred points here and there. That is about 7% compounded return.

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    Earnings for the last 10 years was roughly about 5% and inflation for this period was roughly about 6%. If anybody said that markets do not need earnings, liquidity and all the others can take the markets up, remember, it can do so for a brief period but we need earnings to come back.

    What I think the markets are currently betting on is that earnings for 2021-22 will rebound very sharply. If it does, then markets ride and it moves on from here and if for whatever reason, that assumption does not fall through, then we will see a correction as we have seen over the last 10 years. If your earnings do not come through, then there is only that much that the markets can return. If you ask me my view, I think markets run up slightly ahead of what it should right now because of liquidity and global factors. But in many cases, we also find undervalued stocks in the market. It is a question of how you pick your stocks, how you select your sectors and how you position your portfolio for what is to come tomorrow and not what is moving up today.

    What is the best way to understand the management commentary from consumer companies, from steel companies which is coming along with their quarterly numbers?
    The management commentary has to be commensurate with where the stocks are trading. If you find that the stock is not pricing everything that the management is saying or what your own assumption is, you have to be cautious.

    For example, we think that in the auto space, two-wheelers would make a comeback. We have not seen great growth . if you go back the last five years. Leave the Covid aside, we are talking of single digit growths in two-wheelers.

    We think given all the changes and all the growth that has disappointed over the years and given what has happened because of the pandemic, two-wheelers and personal mobility as a requirement we will see good growth. These themes were given in the past if you go back to 2009-10 which was a period when rural demand was very strong because of all the stimulus that the government had given and that had resulted in very strong double digit auto growth especially two wheelers. We think that could repeat.

    So it depends on how you read all the numbers and how you read the data points. Some of them you will get right and some of them you may not get right. It is a question of how you position yourself, how you read. At this moment, we think autos are good space based on what the managements are saying and based on also what history has told us and how the rural economy is shaping up right now.

    Do you feel that there is enough strength or domestic interest in the markets currently to withstand any kind of volatility that we might see on that front?
    We have seen even from the March lows, that our markets dance to the tunes of what happens to the global markets especially the US markets. And the most important event for the US market is of course the elections. And at least from whatever I read, it suggests that if Biden were to come, that may not be great for the markets in the short term. But having said that, there is also a view that it is quite good for emerging markets in general, commodities may do well. So there are multiple views on this.

    At the end of the day, if the earnings for our own markets start to rise by the third or fourth quarter, we would be able to withstand some of it but not all. If the markets globally were to correct, our market would also correct and that may be quite healthy, I mean we have seen a one-way market from the lows in March to where we are right now. So in my view that may be a good point where people who are on the sidelines or people who may want to churn their portfolio, that may be a good time to do it.

    How do you see financials panning out going forward given that they have taken a little breather post all the fundraising.
    Within the financials, our preference is for the larger private sector banks, one because they all have managed to raise capital. We do expect that there could be a spike in NPAs. Honestly, not even the banks, none of us can even guess right now what exactly that number is going to be hypothetically. We take the number what Reserve Bank has suggested and if the actual number for the private sector banks were to be lesser than that, there is an upside to these stock prices for the private sector banks.

    The market in view is pricing in what the Reserve Bank has suggested which is about 400-500 bps increase and the private sector banks in my view are well positioned because one they have raised capital, two, competition for them is substantially reducing.

    So the competition from NBFCs and PSU banks is coming down. The conversation with them has suggested that they are able to pick and choose based on their risk perception.

    They are very well positioned in terms of their liability franchise, in terms of how they position themselves on the asset side and also given that many of them have provided substantially for the Covid related and also their previous NPA cycle. Broadly that is our view.

    I have never been a big fan of NBFCs or HFCs and I maintain that that business model has to change substantially. So as far as financials are concerned, just stay put with large private sector banks and avoid all the noise in the sector otherwise.

    Do you think one would have to stay put for a very long haul because even within the top financials you are not really seeing a big bang move across the category?
    Yes, this is the only sector that has not really reacted much, I mean, they have all corrected or moved up from their lows but it is well documented that this is a sector which has to see the maximum pain. So I am not surprised that they have not really gone back to their previous highs or have not even come close to it.

    I mean, year to date, financials are down almost 25-30% and that is fair. My point was from here on, given all the capital raise and all the pessimism that we are seeing right now, the risk reward on the private sector banks is looking far better than it was three months back. So that is my limited point.

    We remain underweight on financials as a sector but you cannot be zero in the sector and within that, we find in the private sector banks, the risk reward is much more favourable now than two, three months back.

    People are finding merit in nibbling into some of the aviation names, multiplex stories, hotel stories. Where do you stand when it comes to the contra theme?
    I guess the contra theme for us has been commodities. Back in March April, even now they were trading at 0.3 book and now we are at say 0.5. I was seeing a very interesting chart where somebody had forwarded a 100-year chart of Dow Jones versus the Goldman Sachs Commodity Index. It is a ratio and that ratio normally averages around 0.5 and it was at 0.1. It had never seen that lows, the last time it saw lows like that was in the 1960s so we are really talking of commodities getting crushed over a 100-year period.

    Even if we were to go back to its mean which is at say 0.5, you are talking of a 5x move in commodities over a period of time. For us that is the easiest trade. c you name it. I like gold and silver also but there are not too many plays in India for that but commodities in general as a space as a contra play we think is very exciting.

    What about aviation, hotel stocks or multiplexes? Would you give them a go at all?
    As a house, we do not invest in some of the sectors because of restrictions that we have, especially hotels. Aviation, I would still stay away. I do not need to participate in every sector that is moving up.

    Having said that, possibly the multiplex entertainment space is something that is worth considering. We have looked at this in a slightly different manner. In fact, we have gone long on the media space which again has got crushed with the whole view that OTTs are taking over and it is curtains for media companies. The space is looking much better than actually the multiplex space so we are quite bullish on media in general. This is the GEC space and given that the advertising revenues seem to be coming back, currently it is priced for almost 50-60% fall in advertising but subscription revenues continue to be very buoyant. In fact, they are growing on a year-on-year basis and the valuations of these companies look very attractive. They are also cash throwing companies, some of them have 5-6% dividend yields.

    There are many contra plays and different houses look at stocks in different ways, this is how we are seeing the contra plays as I mentioned; commodities is one, media is the other which we think is not today spoken about much.



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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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