We are getting more defensive on metals: Mihir Vora | Economic Times

The SME stress, the retail finance stress is getting reflected in the financials. We hope that in the next leg after the busy season starts, we will see a rebound in domestic consumption. Like the global sectors have done well, the next leg should hopefully be driven by the domestic sectors, says Mihir Vora, CIO and Senior Director, Max Life Insurance. The world is talking about tapering. Some are using words like taper tantrum; some are saying tapering could be scary, that it is going to be the end of the stock market rally. Even if taper happens, what would be the scenario? Will markets react the way they reacted in 2013?Tapering needs to be put in context. It depends really on the circumstances under which the tapering happens. If the tapering or the tightening happens because of inflation scare, that globally things are overheating too fast and some big central banks taking a knee jerk response to inflation, then it may not be a great thing. But if tapering is happening because we are in a Goldilocks situation, where there is just the right amount of inflation and just the right amount of growth in developed markets, then I do not think it should matter beyond a point. So if the worst case scenario comes in Jackson Hole on tapering, could the market get nervous and should we act in advance accordingly and prepare our portfolios?It is very difficult to predict the outcome. But my base case is that central bankers are in no mood to upset the global financial system, global markets. So anything that comes out of Jackson Hole is unlikely to be very hawkish, frankly speaking. Banks have underperformed for a while. On one hand, we are saying economic recovery is around the corner and banks should be ready as they are the best proxy on economic recovery. While the recovery is real, banks are not participating and especially private banks. Why is that?Mihir Vora: My take on this is as follows: One is that while we have seen a good, really sharp V-shaped recovery in stock markets, not all parts of the economy are recovering in a V-shape. There are segments which are leading and segments which are lagging. So far, since the beginning of the pandemic, we observed that the segments which are leading the economy are externally focussed sectors like IT and pharma, some of the auto components and global commodities. These have done very well and that is because the pace of global recovery has been much better especially in the developed markets like the US, Europe and Japan where the stimulus was so much, so high -- fiscal as well as monetary -- that they just blow past any kind of a slowdown in consumption and rebound with vengeance first in goods and then in services. So far, the stock markets have been led by external facing sectors, whereas domestic consumption, etc, has been a bit subdued as we can see in the auto numbers, two-wheelers, car numbers, etc. My guess is that some of these concerns are reflected in the financials. In fact, some of the mid-sized housing finance companies and some of the microfinance companies are talking about delinquencies at the lower end. In India, probably there is some kind of K-shaped recovery where the rich and the large corporates and rich portion of the population has been relatively unscathed. White collar jobs have been relatively unscathed, whereas in the lower end, we have seen some stress in the system. So to some extent, the SME stress, the retail finance stress is getting reflected in the financials. We hope that in the next leg after this busy season starts, we will see a rebound in domestic consumption. Like the global sectors have done well, the next leg should hopefully be driven by the domestic sectors. Coming to newly listed names, it is not all hunky dory for IPO allottees. Having said that, Zomato, Devyani International, Clean Science Technologies, Shyam Metalics, Sona BLW, Nazara, Barbeque Nation Hospitality have definitely made some solid gains from their IPO price. But there is a longer list when it comes to names which are sitting below the IPO price right now. What are you making of the environment when it comes to investment in IPOs?IPOs should not be treated differently from any other stock. The only difference between a listed stock and an IPO is that for an IPO, one does not have yesterday’s closing price to benchmark it against. For that, we really need to go on a case to case basis and it all boils down to valuations. I do not think it is even related to what sector the IPO is coming in. We have seen chemical companies, restaurants. We are likely to see fintech, consumer tech, delivery companies listing. There are different business models and we are taking it very selectively on a case to case basis and trying to figure out what the premium or discount to the relevant listed peer set should be before taking a call. Ideally we would want the company and the merchant bankers to put at least some discount to the relevant peer set; otherwise, after a series of failed IPOs or listings below the IPO price, investor interest may be waning and that is not in the best interest of anybody. So investors like us, institutions as well as retail investors, should be cautious and look at it on a case-to-case basis from the valuations point of view. But the companies and merchant bankers also need to understand that ultimately investors are out to make money and there has to be something for them. Have you subscribed to any of the recent IPOs or been an investor in any of the recent listings?Yes we have been investing quite regularly on a selective basis, not all of them. But as I said, using the same framework of valuations, interest and applying some kind of rationality, we have been participating. Auto stocks are getting punished. Is it temporary or are markets worried about the terminal value of some of these companies because some may not make it big in the EV business? A more immediate threat is in the two-wheeler space as far as auto is concerned. I think the economics of car EV probably will take two-three years to stabilise or pan out and we probably need much larger government intervention to make car EVs more and more viable. More subsidies are required, etc. But the most immediate threat is in two-wheelers where already there is a very narrow differential between the electric vehicles with their advantages and the internal combustion scooters and motorcycles. It is an interesting space. In a more immediate future, as far as cars are concerned, it will be more a function of job creation and demand coming back in the festive season and, of course, hopefully the chip shortage and the bottlenecks will be resolved. However, what I am not sure is how much of this commodity price inflation has been factored in already into the margins. We did see pressure in the last quarter, but whether we continue to see some more pressures in the next few quarters is something that needs to be seen. While we might see the top line revived in the next one or two quarters, the margin pressure might continue still and that will also bring in some underperformance in the car segment. In two- wheelers, as I mentioned, the threat of electric is much more immediate and that is the reason for two wheelers underperforming. What is the right way to understand metal stocks now? Where are metal stocks headed and for a fund manager what could be the turning point where you would say I have made my money in metal stocks and I am going to press the exit button now?I do not think it is a strategic call, it is always a tactical call for us. Metal stocks did not do anything for five years and in six months, they doubled and tripled and so we need to be tactical about it. As far as we are concerned, we did go overweight on metals a few months back but we are already on our way to be being neutral and maybe even underweight because the biggest demand for metals is going to come from China. While the US is talking about infrastructure spending etc, it is going to be over a period of time and it still will be much smaller than what China does in a year so to say. So for metals, especially the big ones like steel, aluminium, copper, it is always going to be the China story and China is slowing down on its infrastructure spending. So to that extent, the best might be over and the kind of crazy prices that we see in Europe and HR prices that we see in Europe and the US are more a function of supply side bottlenecks rather than demand going through the roof. We are already on our way to being more defensive on metals. Why do we have such divergent views in the consumer tech space? There is a section which feels that the market cap of a stock like Zomato should be 50% lower than what it is. There is another section who feels that the entire consumer tech business is high growth, good governance and exponential growth space. The difference is not so much in the potential of the top line of these segments whether we are talking about consumer tech or fintech or all these new business models. The difference is in the valuations and what are the terminal growth rates that you will assign to these segments? The big difference is in opinions. We are feeling our way around as India has not been used to business models listing where there is good cash burn. Do not forget the telecom companies listing in the 2000s, where after listing they were also kind of loss making and cash burning profile and then of course exponential growth happened in the EBITDA and the stock prices. It is not like that we have not seen, but it has been far and few in between. Most of the multibaggers or exciting segments have been IT services in the 2000s where they were cash generating machines. Indian investors, whether it is the institutional investors or retail investors are grappling with this new business model, trying to understand how to value these stocks. We are also in that camp. While we have international benchmarks, the Indian companies frankly are trading at higher than international benchmarks. So even that is not a very useful reference point compared to China or the US. But yes, these business models are here to stay. Valuations will stabilise and that will be an interesting story. But even if one takes a conservative view, in the next three to five years even 10-15% of our market cap can come from these kinds of companies. It is a segment which one cannot ignore even if you do not agree with the valuations. What are you making of the risk on, as we head closer to the Jackson Hole meeting? The market seems to have priced in some taper tantrums, but that is surely having a move on gold? Gold is now back above $1800 an ounce and that will rub off on the gold financiers. What does it spell for the prospects of Muthoot and Mannapuram?The gold loan financing companies in the short term are linked to gold prices. But if you look at the longer term five-year, 10- year picture, it is more of a secular growth story. People will use their gold assets and India has one of the largest reserves of gold in the hands of private individuals and that will continue to make it an attractive business proposition. So while in the short term, it does seem like the stocks are linked to gold prices but in the long term it is not necessarily the case. So I would not read too much in the short term fluctuations of gold prices. However, one should definitely look at the underlying borrower profile which in the last few months has been a bit under stress. We talked about the K-shaped recovery at the lower end of the economic strata has felt the impact more, especially in the second wave. In the next few quarters, there might be some stress on the book but again gold loan companies are well covered in terms of their loan to asset ratio. I do not think it is an existential question either for any stock or an industry, it is a cyclical thing but structurally the lending story remains robust.