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Next 15-20 years, insurance stocks to be top wealth creators: Jagannadham Thunuguntla

ET Now|
Updated: Jun 26, 2019, 10.37 AM IST
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Highlights

  • Corporate world lives on debt and without liquidity, there is a massive hit.
  • IT is a safer global theme than pharma.
  • Auto to see downtick in next 4 months, but will create wealth next 4 years.
If you want to play a safer global theme and rupee weakness theme, IT is a safer theme than pharma, says Jagannadham Thunuguntla, Senior Vice President and Head of Research, Centrum Broking. Excerpts from his interview with ETNOW.

Post election results, there was a sense of excitement and a bit of euphoria on the Street. Everyone thought that return of NDA-2 meant acche din wapis aayenge (good days will be back). Local sectors will do better, industrial cyclicals and economy related sectors will continue to outperform. But one month into the NDA-2 regime, the outperformance is coming from IT and metals and which are global facing sectors!
Absolutely. One month after the NDA 2.0 swept back into power, there is a tempering of sentiment and that is probably because of the ongoing corporate defaults. At the fag end of NDA 1.1 or the Modi 1.1 era, many people thought that the second term means there will be a comprehensive plan to arrest corporate defaults and there would be a 100-day plan to stop the downturn in corporate confidence and sentiment.

Frankly, from May 23 to June 4 -- the first 10 days of the new government -- in terms of businesses and trading volumes and brokerage amounts, everything was looking robust. But since June 5, the day DHFL defaulted, till now, for the last 20 days, it has been one-way downward trend. New corporate groups are getting into trouble that is a major weak link. Once that happens, the confidence and liquidity goes for a toss.

Now, a lot depends on the budget. Can a sense of sanity come back? Will they announce some fiscal respite to stimulate the economy which is at a 5-year low? Also, will there be any plan from the RBI and the government to stop this default pattern? It will be a moral hazard to create a wrong precedent by bailing out any of the corporate groups, but there should be a very robust junk bond market like in developed markets to bail out some of these groups. Otherwise, there will be just a spiralling effect. One after another, the corporate groups keep getting into trouble. Make no mistake, the corporate world lives on debt and that is the lifeblood and the moment the oxygen is out, there will be a massive hit.

Where have we seen some strength in the markets despite the ongoing concerns?
We are quite bullish on insurance as a space because we feel that insurance for the next 15-20 years can create the kind of wealth that banking has done over the last 20 years. Very few insurance companies are listed. Now, it can be a major theme.

Among BFSIs, the focus will shift from B to I. While banking has its own meaningful role, but for many companies with Rs 5 lakh crore, Rs 10 lakh crore market caps, it may be difficult to generate the kind of alpha for multibagger returns. Going forward, that role has to be played by insurance. We can feel that on a daily basis when these stake sales are happening -- be it in HDFC Life or SBI Life -- and the kind of marquee global FIIs coming in and buying these stakes, tells us that an important wave is building up. So, do not miss the fun.

HDFC Life probably will remain the top pick because of the HDFC tag name. It will remain expensive and many global investors do want to get in. Even SBI Life is in extremely good position because of the penetration of SBI. However, one should always mindful of the risk involved of any PSU because of the government intervention at some point. So SBI Life comes with its own PSU related risks. But the space is looking phenomenally good.

What are some of the so called contrarian bets that you are looking at in auto and consumption space?
If you are looking for contrarian, you should be mindful of the fact that when you buy it in three-four months, it can be very trying because a torrent of bad news and a torrent of sell recommendations will be coming. You have to stand against the crowd. It is very difficult to execute the trade. If you are willing to take that risk, assuming the cycle will rotate in the next four-five years, auto can be a great theme. It is a proxy for the economy and economy works on cycles and naturally for the markets, they ignore risks in bull markets and opportunities in bear markets.

Within auto, M&M can be a good opportunityThey are already the first in terms of positioning of electric vehicles and the stock has not done anything over last five years. That shows the stock is undervalued because the company has been growing but the stock price has not done well. Also, they have other investments like Tech Mahindra, Mahindra Holidays and Mahindra Lifespace developers giving that extra bit of comfort in terms of auto slowdown.

So if somebody looks at M&M today, 60% of the market cap is represented by auto and other businesses are representing the remaining 40% of market cap. M&M is like a mini mutual fund with higher weightage to auto sector. M&M can make a great story. Of course, it is a contrarian trade. There is a very much possibility that you may see downtick in next four months but you will make a lot of money in four years.

Currently there is a macro tailwind in rupee and the bond yield. All three important indicators of macro are firing in the right direction. Would you still buy IT?
Absolutely. IT is still appearing to steam left despite the fact that most of the Street has been bearish on the trade but we feel comfort in IT considering the ongoing economic slowdown. Smart money would like to hide in IT if nothing else. Also the Bimal Jalan Panel may come out and announce a Rs 1-2 lakh crore dividend from RBI for the government. That will increase the liquidity in the system. RBI will have to get that extra two lakh crore printed and put that into the system. As a result, the rupee may see a knee-jerk weakness when that eventual announcement comes.

If that amount happens to be bigger, let us say Rs 2-3 lakh crore, there is a higher chance of rupee weakness meaning thereby the tailwind for IT will be much higher. Also, many stocks are positioned reasonably well as the multiples are not too high and also most of them are talking the shareholder friendly language in terms of buybacks and special dividends. Largecap IT is appearing to have a decent upward momentum. Of course, the hay days of so-called growth is over. The market is also aware of it. It is just a stable growth and they are positioned reasonably well. Bet on IT is a lot more safer than bet on pharma as the latter is struggling with its own set of FDA related issues. So, IT is a safer trade than pharma.

A buy is coming in on Sun Pharma from CLSA. What do you feel is the outlook over there when it comes to the pharma major or any of the other names that you are looking at?
Pharma as a space will have two major challenges -- the FDA and the November 2020 US elections. There is a chance that Trump will probably keep posting that pressure on the emerging market pharma companies because healthcare is a very sensitive subject for US politics.

Keeping that into account, pharma may remain under bit of weather. We have to be mindful of that. However, because the valuations have reached such convincing levels, some accumulation have started happening as a contrarian trade. But if you want to play a safer global theme and rupee weakness theme, IT is a safer theme than pharma.

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