Let us begin the discussion with chemicals itself. We have been waiting for that recovery. Last couple of quarters we have been calling that perhaps this is the worst, this is the worst. There will be recovery in a couple of quarters. But is there really light at the end of the tunnel?
Pankaj Murarka: Well, as far as chemicals are concerned, I think the sector has gone through a severe massive slowdown in global demand and there has been a de-stocking at the customers end and on top of that there has been a slowdown in China and Europe as well which is impacting global demand and on top of that we have seen price corrections as well. So, I like to believe that we are near the trough as far as the chemical cycle is concerned, but it is still some time before we see an uptick in the sector as a whole. But clearly what I am seeing is when you look through some of the companies which have announced their results, the earnings are finding a trough.
We have had earnings which contracted by about almost 25-30% for most of the companies from their peak earnings two years back. So, probably now earnings are settling down and finding a trough probably, but I think it will take a while before we see an uptick.
Do you think the market ran up ahead of earnings, at least in the near term and perhaps that is what explains the weakness in the auto names?
Pankaj Murarka: Yes, absolutely. I would think so. We have had a ferocious rally in the markets over the last 15 months. The post-election rally has also been very sharp. I think there is nothing wrong fundamentally with the underlying economy or broadly with the numbers that we have had so far. They are pretty much in line. It is just that the markets have been a bit too ahead of earnings given the strong liquidity flows and momentum that we have seen. So, probably it is a time for markets to pull back a bit and spend some time or consolidate some time. I think broadly, directionally, earnings momentum and economy remains in good shape. So, probably a pullback or some consolidation should be healthy for the market from a slightly more medium-term perspective. So, I think any pullback in that sense should be a good opportunity for long-term investors to step in.
What do you make of the platform companies? And you have been tracking the likes of Zomato, Paytm quite closely. Were you impressed by the kind of show that Zomato delivered yesterday? And if at all, do you think it is priced in or do you think this is the blue-sky territory now?
Pankaj Murarka: No, I think the numbers have clearly surprised us on the upside and now everyone realises that while Zomato, the food delivery business has become profitable for a while now and has been growing phenomenally well, but over the longer term the bigger value will actually emerge from quick commerce business, which in Zomato’s case is Blinkit.
So, I think the combination of both these businesses, the numbers were really phenomenal. It is like hitting the ball out of the park. And more importantly, the visibility for growth continues to remain very strong over the next probably not only short or near term, but also from a slightly more medium term to longer term perspective. So, the business is on a very strong footing.
Obviously, valuations are rich. But the point I am trying to say or I always said is in case of these companies, one, there is a very significant high operating leverage, so the high revenue growth actually amplifies your profit growth and secondly, these businesses given their low penetration levels and incremental or significant increased consumer adoption can sustain that high growth for a long period of time.
And more importantly, some of these businesses have now started demonstrating pricing power. If you see in case of Zomato, they have increased platform fees which was zero almost a few years back to almost, I think, five or six rupees that they have started charging most of the cities, so that is a reflection of pricing power these businesses are demonstrating. So, these businesses have a long-long runway for growth.
So, you are saying at 264 also, it is a good buy for the long haul?
Pankaj Murarka: Absolutely, I think so. Eventually, some of these quick commerce players, the future of organised retail now is quick commerce. Some of these quick commerce players, be it Blinkit or maybe Instamart from Swiggy, whenever they get listed, probably will become as big as the largest retailers in India and in this context that businesses are still very small and they have a very long runway to go.
If the market were to fall a little bit more along with the rest of the globe, what should one’s shopping list be like?
Pankaj Murarka: Well, one, I continue to remain very positive on IT. We are coming out of two years of slowdown in IT as a sector and probably we are seeing initial signs of revival in IT spends globally and probably once rate cuts set in in the US probably starting September, we will see that trend accelerate because global companies have been holding back on IT spends for a while on fears of US recession and probably once those fears are put to rest and we start seeing rate cuts, I think we will see acceleration there.
So, IT looks, and in the context of overall market, I still think valuations in IT are reasonable versus a lot of other pockets of markets, so that looks interesting.
Apart from that, pharma or healthcare as sector continues to look pretty decent because earnings there continues to remain very resilient and there is incremental scope for margin expansions in the sector, especially US generics business for most of the companies which are focused there and valuations still are reasonable in that sense.
So, healthcare is another sector which looks interesting. I would also expect probably in the second half of this year we should see a revival in discretionary consumption in India because we have had a very sharp slowdown in consumption over the last five or six quarters.
But probably we will have the benefit of low base and probably normalised monsoon helping agriculture and come into the second half of the year. So, some of these consumer related stocks which have underperformed over the last year-and-a-half they probably could be another interesting pocket of the market in that sense.
But given an option would you be a subscriber to the Ola IPO?
Pankaj Murarka: Well, it holds a lot of promise from a slightly more medium term to long term perspective, so probably we will rather wait for it to get listed and probably see how things play out before investing into it.
But I would think it holds a lot of promise because it is very clear that probably we have already reached some sort of inflection point where 5% of two-wheeler sales now are EVs and usually it has been the experience that once you get to 5% number, you see a very sharp uptick in that number or the adoption increases very significantly.
So, I think the adoption of electric vehicles or electric two-wheelers in India has reached that inflection point.
So, over the next five to ten years we will see a significant increase in the penetration of electric vehicles within the two-wheeler segment and Ola if they execute well with their product suits and sales, probably they have a fair chance to be a meaningful player in this case.
