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IT Stocks in a sweet spot

Blog Blog Details
  • July 07, 2021
  • Manish Sonthalia|
  • Fund Manager
Do you find merit in buying energy stocks?
Definitely, there is a merit in buying energy stocks. Crude oil may move up to $80 and beyond. There are experts who are even talking of $100. Because of the global opening up trade, the demand will increase. You do not have too much of supply coming in because of the EV angle. Shale gas is not going to change supply dynamics significantly. You are looking at a situation where the product demand is going to be far in excess of what it has been so far. So I think refining is in for a super cycle. It will have a trickledown effect on LNG, PNG, coal, etc. This is one space which is quite undervalued and out of favour. There is an ESG angle to this whole piece, but if there is some merit in terms of risk and reward this clearly looks like a good bet.

What does this shortage of semiconductor mean for Tata Motors and other auto stocks because if Tata Motors has a semiconductor or a chip shortage, other companies will also have the same?
There has been a chip shortage globally. The chip is required for many industries, whether it is air conditioners, motorcycles or four-wheelers. In the last two conference calls, auto majors have been highlighting that there has been a chip shortage. There was some hope that this is going to get abated over a period of time. Now it has not got through even as we speak in this quarter. So it is more of a supply side issue than a demand side issue. Markets are going to look through this.

How are you looking to play the entire agri theme? Amid predictions of a normal monsoon, is there any way that you are looking to bet on rural as well as agri stocks?
Agrochemicals are in a sweet spot. The only problem is that in the fourth quarter of FY20, a lot of supplies got pushed to the first quarter of this financial year. On a year-on-year basis, the first quarter numbers are going to look like single-digit earnings growth because a lot of postponement of supplies happened in the first quarter of FY22 vis-à-vis what was supposed to happen in the fourth quarter of FY21. This was due to a lockdown situation that we saw in the fourth quarter.
But on an ongoing basis, the second, third and fourth quarters will work very well for agrochemical companies, particularly for fertiliser companies. The valuations are pretty benign as compared to historical valuations when we had good monsoons. This is one space which looks good. The wealth effect in rural India is clearly there because of rising agro commodity prices globally and a decent monsoon. MSPs have increased, contributing to the wealth effect. The second wave of the pandemic has hit rural India pretty hard and it will take some time to come back as compared to urban India which will come back faster.

Agrochemicals and fertilisers look like to be in a sweet spot and may get rerated in the second, third and fourth quarters.

What are you betting on when it comes to the IT space?
Well, the IT story is here to stay for at least the next couple of years. The demand environment is extremely strong. There are supply side issues. The key things to watch out for is the traction in deal wins and margins. I think the clear monitorable as far as IT companies are concerned is not in the demand aspect, which is going to be quite strong, but how are they going to traverse through the margin picture. A lot of expenses which were hitherto not there in the last year has come back. Travel expenses, sales, marketing and general expenses will move up. Salaries have increased and there is a shortage of lateral hiring as far as the talent pool is concerned. So watch out for how each of these companies manage the employee pyramid. But the environment remains quite strong. The sector is in a sweet spot.
This interview originally appeared in Economic Times on 7th July, 2021. 

This article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The Stocks mentioned herein is for explaining the concept and shall not be construed as an investment advice to any party. The information / data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this article are as on date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article. Investments are subject to market risks, read all scheme related documents carefully.

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