This is the time to buy Reliance; keep out of UltraTech: Deepak Shenoy

Are you surprised by the rally in various smallcap names over the last 10-15 days? Do you think that is where action is happening in the last 10 days and how markets have got re-rated?
Yes indeed markets have been very micro and smallcap focussed in the last few days. It is a little scary because the large caps are not doing that much. Some of the smallcaps have doubled in the last let us say 15 or 20 days. I generally find such situations typically shorter term in nature and either the largecaps catch up and the smallcaps moderate themselves or the whole market falls. So I would not put too much of a positive spin on it but it is a very retail investor led market right now. So enjoy it while it lasts.

What did you make of UltraTech numbers? We have seen margin contraction but there has been a beat when it comes to the bottom line?
I am not sure I understand the beat part. To be honest it is pretty but they have not paid taxes this quarter and so the bottom line looks better. But the pre-tax number is 33% lower in comparison to the same quarter last year. This time, of course, there has been some unseasonal rains and some other issues have been plaguing the construction market place including issues in NCR. But overall the numbers look lousy.

We are seeing real estate stocks go up and they have been going up the last few weeks and months but a company like UltraTech to have demonstrated this low level of margins, especially when they have been raising prices as well sounds a little strange. I think the company is overvalued substantially. The stock is up also today but the moderation in valuations has to come in for something that is growing at such a comparatively slow pace.

And what did you make of HCL Tech? What would you recommend?
Markets are saying if you are not as stellar as your competition then we are going to cut down the company to size. But the short-term moves do not matter so much. There is largely noise in the overall scheme of things. HCL Tech results were not ridiculously bad. The midcap IT pack has much more margin compression than HCL Tech has and while the margins came a little bit lower than last quarter, over the last year, the margins have moderated from 27 to 24. The company may end up rebounding as time goes by. So I would not place too much weight on it.

We do not have ownership in it though we have ownership in a bunch of IT stocks but I do expect midcap IT earnings to be far more negatively impacted specifically on margins compared to HCL Tech. So it does not come to a buying opportunity yet, but let us see how the market treats it in the days to come.

Sectors like sugar, ethanol, probably fertilisers and others have been forgotten by the market for 10-12 years. Do you think re-rating over there will sustain? .
Sugar is starting to show some positive price movements because the UP elections are coming. They would not do anything negative and are more likely to do positive things. The increase in ethanol mixing ratios will also probably benefit farmers. However, one of the problems with sugar is that it has a very massive political ecosystem. If one is not in touch with politics, then the cycles will not play out in their favour. So while it may look good from a price and a balance sheet perspective, for the last 10 years it has been a political gamble.

I would say play it short term if you like, but long term I am really not interested in something that has to be tracked so closely, specifically fundamentals like the political compulsions rather than the fundamentals of the companies.

Whenever the cyclical stocks – be it sugar, steel, cement – are in up cycle, they make you believe that they are the best companies to own and when in a down cycle, they will make you believe that these are the worst companies to own.
Yes well most cycles tend to be like that. They give you a feeling of disbelief because the fundamentals look like they are still strong because stock markets and the stock prices seem to correct early and then the cyclical nature of the business starts changing. To give an example, steel prices are down 25% perhaps from the top in October to what it is now and yet we have had a removal of the steel curbs and so on. Still steel companies have corrected but not as much as perhaps steel prices have.

The results that come in this quarter actually will be quite decent in comparison with what we might imagine and the deterioration of the results may start being visible only post this quarter. So cyclicals should be played from a perspective of people who understand these sectors much more and they will participate in the prices. If we see the prices starting to weaken, especially of a sector that is moving so fast, we might actually get an advance warning of what is to come.

So it may be useful if one is not fully in the sector to use prices as a proxy rather than just use the fundamentals of the companies at hand.

Do you think can be the dark horse of this earning season?
I do not know about this earning season because I think they will do well on Jio because the increase in prices affect their bottom line a lot more than it does the other telecom companies. Relatively, they have got some market share improvements. They have also got a lot more happening on the retail end; a bunch of acquisitions, a lot more to talk about and so there will be a mix of a lot of things.

I do not expect this quarter to be blockbuster in a meaningful way, given how volatile oil prices were in the quarter but longer term, from a 5 to 10 year perspective, it is a very interesting stock. We own it and so are quite biased in that aspect but the businesses they have which is Jio and retail have one of the largest scope of growth in India in terms of sectoral growth and they are not afraid to get in by acquisition. They have done a bunch of acquisitions recently in some of these delivery startups and they have a bunch of other startups which they have acquired.

They stand a good chance if they were to demerge these entities eventually. Each of these entities might actually be worth as much as Reliance is today. So I am very positive on this but a 10-year timeframe rather than on a one quarter one. So I do not know about this quarter. I hope something good comes out of it but this is a time for us to buy rather than to sell. I’d be happier to spread my buying over a longer period.