See no trend reversal in IT: Gurmeet Chadha

“I am pretty constructive on Reliance as far as the long term outlook goes. The bigger trigger would come when three businesses are demerged into three different units,” says Gurmeet Chadha, Co-founder, Complete Circle Consultants.



What is it that you will be watching out for when it comes to Reliance Industries and what kind of a performance are you expecting in Q3?
The stock has been under pressure since the Aramco proposed 20% stake sale in the oil to chemical (O2C) did not go through. But the quarter is likely to be better with both O2C as well as the new age businesses doing well. Also, while 60% plus revenue still comes from the energy and O2C business, the EBITDA is just the other way; almost at 57-58% comes from Jio and retail. This transition with the consumer businesses doing well will continue.

I am pretty constructive on Reliance. In fact, I am also constructive on the energy initiatives they have taken. It is very similar to what they did with Jio a few years back when they were doing capex. The energy business in the future should also add, especially the new energy business. The focus they have on solar, green hydrogen etc should add a lot of value. Probably the bigger trigger would come when three businesses are demerged into three different units.

I am pretty constructive on Reliance as far as the long term outlook goes.

Nothing wrong with the IT numbers and there has been upbeat commentary; but every stock has fallen post numbers. What is your view?
It is partially to do with the fact that a lot of the expectations started building up in December second half when Cognizant came up with numbers and Infosys, TCS, Tech Mahindra – most IT companies – ran up. So I think it is partially because of that initial runup. Second, I do not see this as a trend reversal. Few percentage basis points, 4-5% correction after a sharp run up is completely normal and healthy in my view.

There will be some differentiation now. Lots of IT companies are now migrating from just being pure vendors to digital transition partners. For example, if you look at Infosys deal pipeline, they had almost 20 plus deals of $50 million across various sectors and industries. Their Cloud, which is the Cobalt, is getting great traction. So I do not think this is just a few months or a few quarter’s trend. Even some of the midcap names are getting differentiated.

L&T Infotech had 9% plus quarter on quarter growth which is the best ever since their IPO. Coming to their deal pipeline, the management was saying that it is high. They have opened new logos in banks this quarter. We are probably in the mid stage and any correction in my view is welcome. But yes, if you are at 40-50 earning multiple, there will be these bouts of volatility and in my view that is normal and healthy.

Why has Bajaj Finance fallen post numbers? The stock post numbers went up 2% but has come down 7%!
In December, pre-results also, it was at around Rs 6,500-6,700 range. It has always been a high beta stock which trades at 9-10 book multiples. So it is always going to be the case with it both on the upside and downside, one tends to see sharp movements in Bajaj Finance.

What probably could have led to some profit taking was great performance. The next level of growth is their super app which equates with fintech and that is why it commands that kind of book multiple. The second phase of the launch, meant for the customers, probably will start in September. The first phase which is more on E2B which is existing to Bajaj customers has done fairly well. I always say it is a consumption stock in the NBFC bracket. It continues to grow at that pace even now at a much higher base.

I do not want to add at these levels but yes if you see more corrections, Bajaj Finance has always been a great stock to add especially during sharp volatility.

After reading Asian Paints numbers, what kind of outlook do you have within the space as a whole?
I always think that with Asian Paints and Pidilite, this debate of growth at any price has been around for five years. Asian Paints has continued to see expansion both in earnings and the multiples. What is important here is that this has been a fifth quarter of double digit volume growth in the decorative paints business which reiterates the point that the housing sector is seeing a big revival.

The industrial quoting was double digits. Even the international business grew about 9% in value terms. The other home improvement themes which Asian Paints is into is currently too small but that could possibly be the next growth lever. So, we are in general positive on this building material space but considering the valuations, I will be more constructive on the cable and wires makers, the pipe makers, the sanitaryware makers, the other building material space, something like let us say Polycab. They have a clear target of hitting billion dollar revenue in the next two-three years. They are migrating from B2B to B2C focussed players, adding more distribution, migrating into fast moving electrical goods.

Some of those names and even some of the housing finance companies like HDFC Limited, tend to be very flattish and the disbursal rate across commentary has been very strong so that is probably a better way to play this considering the sharp valuations which Asian Paints or Pidilite trade at.

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