Divestment target will be overachieved by a wide margin: Sunil Singhania

CY20 was a unique year that witnessed one of the sharpest falls in the markets in recent years and an equally sharp recovery, says Singhania

It has been a rollercoaster ride for the markets over the past few weeks. SUNIL SINGHANIA, founder, Abakkus Asset Manager, tells Puneet Wadhwa in an interview that he remains positive on the markets, notwithstanding sporadic corrections on news flow related to Covid and rising bond yields. Edited excerpts:
 
Do you think the markets have run their course for now, and there are more reasons for a downside?
 
CY20 was a unique year that witnessed one of the sharpest falls in the markets in recent years and an equally sharp recovery. Many stocks have moved sharply higher and are trading well above even pre-Covid levels. That said, fundamentals have also similarly improved sharply and much ahead of most expectations. Given the likely sharp earnings growth, lower interest rates, and ample liquidity, the focus is now back on capex and growth; we remain positive on the markets, notwithstanding sporadic corrections on news flow related to Covid and rising bond yields.

 

Can sporadic lockdowns across cities unnerve the markets in the short-to-medium term?
 
The number of Covid cases keeps falling and rising in different cities and parts of the world. However, wherever vaccine rollout has been aggressive like in the US, the UK, and Israel, there is enough evidence that jabs have been effective and cases have come down sharply. Until a majority of the global population gets vaccinated, this sporadic rise in cases in different cities will be a part of our lives. So far, newer lockdowns have been local and not complete. As of now, there seems to be no major concern.

 
To what extent are the markets factoring in a possible deterioration in macros given the rising commodity prices?
 
After a long bear market, commodities across have seen a sharp rise. It’s been a combination of higher demand, some shutdowns, as also investment-led demand. There will surely be some inflationary impact; it has been in a manageable range for now. On the oil front, though prices have moved up, it’s been largely because of supply discipline and some weather-led production shutdowns in the US. The demand scenario continues to be weak and with renewables becoming cheaper, the world is focusing aggressively on decarbonisation; hence, the medium-to-long term view on oil prices is benign.

 
Over the next few months, do you see a more broad-based participation?
 
In the last few years, quality at any price was working as investors piled on the same stocks. The economy has started to recover. With growth now looking like returning sharply and even capex picking up, broader markets should handsomely outperform. The trend has already started as reflected in the big outperformance by mid- and small-caps over the last six months.
 
Are earnings at risk of disappointing again, especially in the third and fourth quarter of FY22 as input costs rise?
 
Some companies and sectors will surely face some margin pressure as input costs rise. However, sales growth should negate some impact of higher raw material cost. Lower other costs like travel, etc, and lower interest costs should also be a tailwind for profit after tax (PAT) growth. Additionally, India is a diversified country and there are quite a few sectors that will benefit from the rise in commodity prices.

 
Your overweight and underweight sectors?
 
We continue to be positive about IT and digital stocks. Corporate banks, se­lect NBFCs, and select engineering companies are the themes that we like. Additionally, tier-2 and tier-3 cities- and town-facing consumption plays are a part of our portfolio. Pharma has underperformed in the last six months and our view is that the sector should start seeing traction again.
 
It is almost one year since the world grappled with the pandemic. What are your learnings as a portfolio manager during this period?
 
The biggest learning is that one can plan only for something that is visible. We can’t plan for something that comes all of a sudden and with no warning or early signs. Also, the year turned out to be the biggest opportunity. For us, ‘never let a crisis go waste’ was the biggest learning. Remaining positive has always worked for me, and that is another lesson.

 
How should one approach public sector companies against this backdrop?
 
The government is now calling the exercise ‘privatisation’, rather than ‘divestment’ and that’s a big positive statement. Statements like ‘government is not in the business of being in business’ and only strategic companies will remain in the government’s fold give us a lot of confidence that we are moving into a period of 2-3 years where massive privatisation is definitely on the cards. Our view is that the divestment target will be overachieved by a wide margin.