Diversify portfolio and focus on strong earnings while picking stocks: Gurmeet Chadha
ADVERTISEMENT It has been a pretty range-bound market but of late, the FII selling is getting a little bit larger and even though there is DII support, the Nifty range is getting lower by the day. What do you think is the worry point for the market?
Gurmeet Chadha: Three-four things are worrying the market. One is this uncertainty. The market can price in risk and so, if the event is over, should be able to price it in. The tariff deadline is now weighing on the market because since July first week, we have been hearing that we will have an interim deal, and then there was news that there will be no deal and we will have tariffs and a comprehensive deal will happen sometime in September or October. So, there is a bit of an uncertainty there, and that is why the export sensitive sectors have been underperforming the market. Whether it is auto, textiles, or anything that is more global supply chain facing, especially US-facing is underperforming.
Secondly, we have seen other countries like Japan, China get some deals and there has been a bit of a pause. Then, there was a deal with Indonesia which also means that the tactical money, the short-term money keeps hopping from one emerging market to the other or some other markets where trade deals are happening. So, there is a bit of a tactical move here. I do not think we should read too much into the FII selloffs because that has happened mostly after the trade deals got postponed and earnings also have been very soft as was expected.
For example, Kotak was disappointing because the Q1 update was very good. For IT companies, the commentary has been much weaker than what the market thought it would be and the news of layoffs did not help matters. So, it is a combination of all these factors and the next few days in my mind are important from a direction point of view. We have a Fed FOMC meeting, rate cut decision today. We have big tech earnings in the US and the first August tariff line. So, too many things are happening, but the good part is, it has largely been range-bound. Whenever the numbers are good, wherever the news is positive, the market is rewarding it.
Yes, it is. And look at L&T, another strong quarter in terms of the order inflows for them. Revenues have been consistent, margins in line with last year and more importantly, the commentary. L&T is a company that gives colour on which way the economy is headed. We are finally seeing that meaningful move on L&T.
Gurmeet Chadha: Yes, a long view and this is one stock which has not really participated the way it does in larger bull runs. What I liked about L&T other than the order book is the good execution. The net working capital has finally come down to 10.1%, as was their aspiration for the last four-five years when they launched their five-year plan called Lakshya. So, net working capital coming down by more than 300 basis points is extremely heartening. Also, the Middle East orders will surprise on the upside. They will get some very large orders from the Middle East across the spectrum, hydrocarbon, water and then there will be a GCC-related tailwind for them. The only thing is if you see the order mix, the government still accounts for 75% and the private sector for 25%. I would like the private ratio to improve. Once the private sector book picks up, there will probably be a bigger re-rating. L&T has a lot of value unlocking to be done at some point of time. We will see that over the next couple of years. It is part of our core portfolio and probably one of the stronger largecaps which should do well over the next two-three years.
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28 out of the Nifty 50 companies have come out with their numbers, with seven of them being below and only six being a beat versus estimate so far. What is your broad sense on the earnings that we have seen and what is the outlook for the rest?
Gurmeet Chadha: That is where the bigger concern is. FII flows will come and go, but if you see the peg right now, if we are 21 times earnings and earning growth is 7, we are around three times peg and that is expensive. I do not think FIIs will allocate money there. So, once we see a 12-13% earning growth, that is when it will drop below 2. Even the price book is above 3, which is also slightly on the higher side. Once we see meaningful changes there, that is when we will have a sustained rally. Otherwise, the news on tariffs and some decisions here and there, can at best be 5%.
ADVERTISEMENT For a sustained up move, to break out from the previous high, we need good earnings growth and that's why I am saying this is a tougher year and it is very important to have the right balance in terms of asset allocation. The focus has to be more preservation right now and to get into good stocks where earnings are strong. One should not overpay and keep looking at other events like gold, precious metals, commodities, even fixed income. We will see us starting to cut rates. There is more movement happening in terms of bond yields and even long-dated bonds can give good returns. So, be more balanced and at the same time, when you are doing stock picking, be anchored to where earnings are extremely strong.
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