IT a multi-year growth story; large private banks to do well as the economy revives:


“We are cap agnostic, one has to be more bottom up and company focussed in the market. While large caps have borne the brunt of the FPI selling, when FPIs come back, obviously the natural beneficiaries in the short term will be the large caps again,” says Nitin Raheja, Executive Director, Head – Discretionary Equities, Julius Baer Wealth Advisors.

Would you be on a wait-and-watch mode to see whether the reopen theme and stocks and sectors fall a little bit more to maybe add positions or buy afresh into multiplexes, restaurants or hospitality names?
Only if we could get these companies at lower prices and valuations because if you really look at the whole sector, whether it is the retail sector there pricing of these stocks has been pretty fine as such, factoring in the whole reopening trade and growth and so on. If we do get these at lower prices, they are good companies to look at.

Whenever things normalise, we have seen the kind of buying which comes in and the demand which happens with vengeance in a lot of these businesses. For the reasons you ascribed, the kind of content that has been coming up and the response that we are seeing, these are the companies that one should look to buy when bad news is built into them. My own view is that while we are seeing a very rapid spread, we are much better prepared and most governments have a sense of paranoia after having seen what happened in the second wave. We will land up eventually managing this much better.

In terms of the reopen theme, which ones would you bet on – the hotels, QSR industry, multiplexes, casinos like Delta Corp?
Our own preference at the top goes for the QSRs because these will be the least affected of the lot even if there is a shutdown or more precautions are announced. QSRs are followed by retail and multiplexes.

In terms of traditional businesses, what would you want to buy in terms of pharma, IT and metals? Any of the traditional businesses that you like?
IT in my view is a multi-year growth story which is going to play out over the next two or three years. A lot of the re-rating in these companies has already happened. So what we will get now is the growth that will take place in these companies. They will continue to do well. The large banks, especially the large private sector banks, will do well as the economy revives. They are also being affected by the whole technical trade which has seen FIIs being very big sellers.

Whenever, there has been selling, the Bank Nifty and banking stocks which account for a large portion of FII portfolios, bear the brunt of the selling. So once that settles down, hopefully it will be some time in mid January and February. You will see banks come back very strongly. I would believe that you would probably see domestic consumption plays related to real estate – be it tiles, sanitaryware, paints or cement – they are all starting to do well.

With the 65 odd new listings that we have had in 2021 and the fact that most of them have actually come off from their top and after that listing pop, which one would you be tempted to buy after the recent fall?
Some of it was expected because we were in a very frothy market and also the kind of valuations that normally are being offered but what we are seeing is that leaders within the pack, whose business models are very robust and who have market leadership, continue to trade at premiums and handsome valuations.

But we saw plenty of good IPOs. Some in pharma, diagnostics had great robust businesses which will do very well. However, these traded around their IPO price and have just been around there and consolidated. Some of these real world companies are looking very interesting to invest into.

Would you prefer large cap names or midcap names going into 2022 considering the previous rally for midcaps, small caps has been much higher?
We are cap agnostic, one has to be more bottom up and company focussed in the market. While large caps have borne the brunt of the FPI selling, when FPIs come back, obviously the natural beneficiaries in the short term will be the large caps again. But the approach has to be focussed purely on merits and based on the fundamentals of each company. From a sector perspective, if I take the financial sector, then my bias is towards largecaps because since 2018. the whole financial sector has been in turmoil with one event or the other and the recent past has shown at least some of the midcap or the tier-2, tier-3 banks have just not been able to come out of it. So as far as financials are concerned, my bias will be towards the large caps.

In terms of large caps, how would you look at different sectors? Some sectors make losses but continue to see higher subscriptions; others make good free cash flows, reduce their debt, go ahead with new capex. Which side would you be on and what would those companies or sectors be?
I would prefer the second category which have free cash flows, are paying off debt, focussing on future growth and capex and so on. I think sometime in the next one year, we are going to start seeing and in fact, have already started seeing a reversal of this virtuous liquidity cycle. When this normally happens, these are early indicators, companies which are dependent on availability of liquidity continue growing their businesses rather than their own cash flows, sooner or later come into problems. We are in that situation where I would rather go with the second than the first category.

Which is the stock or sector which gave you the best returns in 2021 and which one would you say is a big mistake?
For us, the financials turned out to be quite a bit of a drag because of huge underperformance and given the weight that they occupy in portfolios, it was a very disappointing phenomenon for us.

The other sector which towards the end of the year disappointed us, were the gas and city gas companies, primarily led by a huge jump in LNG prices. On the other hand, IT did exceedingly well for us. We saw a lot of these home improvement companies which contributed very well for us. Companies like PolyCab did very well in our portfolios and API Apollo. All these home improvement related sectors actually showed tremendous outperformance vis-à-vis a lot of companies in the listed market.


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