- Geopolitical tensions to raise market volatility?
- Metal spotlight an India positive?
#ASKHedgeSolutions' Vaibhav Sanghavi in conversation with Niraj Shah on 'Talking Point.'
- Metal spotlight an India positive?
#ASKHedgeSolutions' Vaibhav Sanghavi in conversation with Niraj Shah on 'Talking Point.'
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TVTranscript
00:00Thanks for tuning in. The case for a chat for the talking point show today is obviously about volatility and whether the geopolitical
00:20tensions will indeed raise the market volatility and what to do in a scenario like that. So that's first up on the screen. Of
00:27course do the global PMI is moving up mean that metal prices could do well and therefore does the metal universe become
00:35investable now. And of course whether I.T. earnings are showing any signs of bottoming out or is that some time away. This and
00:43more with Weber song we see you off is good solutions. John's us right now on the show. Good having you. Thanks for taking the
00:49time out. I hope all is well. I just wonder if you are bracing yourself for heightened volatility with the downward bias or
00:57not quite because while the situation erupted Saturday late night our time it was contained within 24 hours as well because
01:06the world seems to be not able to afford another geopolitical conflict.
01:13Yeah of course. I think nobody can or nobody wishes to have an elevated or escalated geopolitical conflict. But what we see
01:23from a global perspective and the way we see is it's it's currently an environment of a lot of contradictions. And why do I say
01:32that is because on one hand when we see U.S. and when we see Fed I think the growth numbers from a U.S. economic perspective at
01:42the same time in terms of inflation have been pretty strong. On the other hand I think China is kind of fighting deflation and
01:51probably you know very lesser growth. Lastly when you look at Europe as well is where we are looking at a possibility where they
02:01would probably push for a rate cuts probably ahead from you know then Fed which generally wouldn't kind of happen. So all in all
02:10there are a lot of contradictions. But to take a summary out of it is basically that the growth which the world was expecting to
02:20be you know having a very hard landing. I think that's gone out of the window. We are looking at economies much more resilient. Of
02:30course these geopolitical conflicts you know may affect some changes but that is something we will have to wait how that kind of impacts
02:40come about whether this conflict kind of continues. And if that continues then of course there would be some sizable impact on each of
02:48those kind of variables. So volatility to answer your question I think is going to stay a little elevated both from a global perspective
02:57and local perspective as well.
03:02So here's a question then. Heightened volatility higher commodity prices typically negative for markets per se in a correlation basis
03:11are valuations not necessarily cheap even if they are not very expensive on a forward multiple basis. Does this therefore lead for a
03:20higher case for sitting on a bit of cash if a portfolio can afford it.
03:27I think you know as a student of risk we've always thought about you know in a way that whenever there is a big binary you went up the
03:35cards or up the sleeve. Typically we as a fund from a long shot perspective go you know highly hedged. So either we take a big cash for probably a
03:44good cash fall or go into an event kind of hedged to a great extent. Now that doesn't mean that you know everybody should be doing that
03:53probably because we are just a return fund and we are kind of an absolute return oriented. But from a relative return mindset it's difficult to
04:01take a call from a net cash perspective purely because the amount of domestic inflow which has been there you know have been very
04:11supportive of the market and fit in case in terms of an example is the year of 2022 when actually we saw through the year outflow close to
04:21about 20 billion dollars from an FBI perspective. However it was kind of completely absorbed by the local kind of inflow.
04:31So I will probably mention that. Yes of course a volatility is there for the next three or four months. If somebody has the appetite to kind
04:42of raise that volatility stay invested. If not you know probably some might kind of take some amount of money from the table.
04:51OK. Now what one part of this conversation or one part of this volatility is to try and figure out if one should if somebody doesn't
05:02have to make the cash call. Let's say Weber and is wanting to stay invested. Does does information technology. And I wonder if we've lost
05:09Weber's and we frame in moments from now we'll try and get it back. But if you can hear me my question is around I.T. and you know when I
05:17spoke to TCS the commentary seemed to suggest that the. While they have confidence on margins the confidence on growth is is
05:31difficult to predict even for large companies and nobody's fault. It's just that the macro environment is such. Would you take a
05:37contra call here on information technology defensive sector consistently place dividends get cash flow equity equity size
05:46consistently reducing due to buybacks. Is does that become a great sector to look at or not quite as yet.
05:55I think the way we would look at from an IT sector perspective I think let's segregate or you know slice that sector into a few
06:02elements. And first is basically the revenue growth which is one of the most critical aspects you know from their valuation
06:10parameters. Now if you take 12 months ago or you know when everybody was expecting that the growth is going to crash and interest rates
06:22are going to kind of move down which is kind of not happened. And because of that crash in growth probably there would be pressures on
06:29the I.T. revenue. Of course in the intermediate period we've seen the discretionary spend kind of getting some amount of pressure. But
06:37on overall deal bookings I think we are very encouraged by how things have been kind of panning out. Now that's on the revenue side
06:46where as per expectations I think there is a possibility of a school of improvement you know coming in the second half of a 525
06:57coming back to the margin which is the other critical parameter on this. And the way we are looking is of course the subcontracting is
07:05something which we need to take a close watch on. But at the same time I think the generative A.I. is probably kicking in in some
07:16amount of efficiencies as well. We do not have the exit quantum in how much bids but we may be seeing some amount of efficiency
07:28getting in which people are not kind of expecting. In fact with A.I. and you know A.I. coming in people were expecting further
07:35revenue pressures which is not kind of likely to happen. So all in all probably there may be a case where on both these two
07:43parameters both on the revenue and the margin we may be seeing you know we may be bottoming out probably in the next quarter or two
07:51with a second half of a 525 much better. So probably I think that is a trade from a medium to long term perspective to start getting
08:01into the space. OK. Well metals are in focus today as the London Metal Exchange is now banned metal Russian metals. Aluminum
08:10surged in in the last 24 hours probably the best single day gain or the highest single day gain since maybe 1987 or thereabouts.
08:19Kanika is joining us to add some perspective on that. Kanika good morning. Good morning. Right. So LME has banned deliveries of
08:26Russian supplies which was produced after midnight on Friday. And this is in response to U.S. and U.K. sanctions. Now these
08:35sanctions are mainly aimed to curb President Putin's ability to fund his war machine. And this is causing uncertainty in the
08:42commodities market. And concerns are arising over potential disruptions in supply chains and the increased volatility in metal
08:50prices. Now market participants are expecting dramatic price movements with regard to this and about the impact on the ban of
08:57prices. And LME has also acknowledged a relatively large supply of Russian metal could flood into the on the exchange and
09:06sanctions are expect expected to prompt discussions at the Global Copper Industries annual Cisco week gathering in Chile. Now
09:14these U.S. sanctions on trading Russian aluminum copper and nickel may benefit Asian materials producers and U.S. and U.K.
09:23sanctions could solidify China as Moscow's primary buyer for key commodities. This ban is likely to drive Chinese imports higher and
09:34Chinese imports of Russian aluminum have already hit their record levels. And this indicates a strategic shift in global trade
09:42dynamics as well. OK. Thanks for that. So that's the base case on metals. Weber just wondering if if this being the base does it in
09:53any fashion make metals an investable pocket. Because I hear murmurs of institutional money wanting to get itself parked in large
10:05metal companies in India as well. What's your sense. Telling for better for us has always been a very tactical play in that you know in
10:14the scheme of things where a lot of variables kind of affect them especially from a global perspective. Now here is a case where you know
10:23because of a technical reason and because of sanctions we are seeing a temporary kind of sport into the base metal prices. We strongly
10:32believe that you know metal prices on a secular basis if they have to sustain and probably you know look up is two things. One you know
10:41that there can be either a cost push or secondly there has to be a robust economic growth on a global basis. Now either of these two
10:50things is not something which we are currently witnessing. So you might see a tactical play coming about because the funds are
10:59probably underweight as well. So there is a possibility that a temporary basis because of these news headlines we may see. But again
11:07it's pure tactical play. I wouldn't merit you know at this point in time looking at whatever variables are available for more secular
11:17kind of run. Sorry Weber so just getting it's clear you are not betting on it for a secular run. Right. Did I get that straight.
11:25Absolutely. OK. Great. OK. So tactical call maybe if you can play it well is what Weber suddenly believes you can. But otherwise for a
11:33secular run at least they are not betting on it. Point well noted. We need to slip it to a quick break. We back from a break. Talk
11:40about some of the big movers of trade today and check Weber some if he's constructive on them or no. We've spoken about metals
11:48already but some more. And of course try and ask about the big question whether the political season can bring about
11:57upheavals that usually come accompany an election season. We'll try and talk about that on the other side. Stay tuned.
12:18Back with talking point right here on any TV profit. Now Philip Capital and some others to what Philip Capital in particular came
12:29out of the note which when they spoke about some of the beneficiaries based on what the BJP is released in this manifesto. The
12:37argument is simple. You widely expect the NDA and the BJP to come back to power and therefore their vision of what they want to
12:44focus on would clearly get backing and therefore would clearly arguably see some bit of benefits there. So that note by the way
12:53has a clutch of sectors and stocks which benefit out of this level. I would love to know. I don't know if you've paid some
12:59attention to that or not but the manifesto came out over the weekend on Sunday I presume. And there was a lot of focus on the
13:05usual suspect areas as well. Green energy of course being their focus on infrastructure railways etc. Are these pockets that
13:13you would be constructive on. Incidentally all of them are down in trade today.
13:19No of course. I think leaders from you know from a policy perspective. One thing we have seen you know over the last 10 years
13:30and what is something which we are seeing in terms of continuation from policy document or manifesto as well is the continued
13:39focus on the supply side at the same time with a vision of what we can probably achieve by 2047. Now it's a you know it's
13:51pretty much something very refreshing to see where you know the political parties manifesto are looking at you know 25 years
14:02hence. Right. And the planning which I put it you know accordingly goes into it. Now having said that when we talk about supply
14:11side I think focus on the ally making India and structural reforms you know on something like you know sectors like a defense I
14:21think really makes us believe that this is a space to kind of continue staying with along with renewables and in form of various kind of
14:32angles of renewables right from you know solar wind power or probably effective use of energy in the biogas or probably hydrogen you know
14:42as well. So I think a lot of plays there largely focus on supply side is what we will probably focus on from a medium to long term
14:52perspective. OK. Amongst everything else the consistent theme seems to be
14:59infrastructure above. So you spoke about it briefly just wondering how how do you dissect what to do because it's a very wide bucket. How
15:06do you dissect what to buy within an infrastructure pocket some from a tactical perspective some from a maybe a buy and hold for a
15:14period kind of perspective. See when we talk about infrastructure right we've always focused on the ancillary which are likely to get
15:22benefited or the suppliers who are likely to get benefited from that whole infrastructure boom. One purely because from a business model
15:29perspective I think we want to be on an asset like models at the same time companies which can have the effect of operating kind of leverage as
15:39well as you kickstart your higher sales higher revenue from your existing capacities. So those are the segments you ideally would want to focus on as
15:49compared to your very very asset heavy or somebody who is doing this kind of capex. Of course those kind of capex you know companies won't
15:59eventually benefit but there is a lot. There's a big gestation period in between where you know that company would not be doing in terms of their
16:08profitability much. So in the initial leg focus on those kind of second order beneficiaries which can come across with a higher
16:19spend in terms of the infrastructure or probably capex. So that is how we would probably look at it. OK. OK. So that's infrastructure. Now
16:28the other bucket which is active today is oil and gas. Everything from upstream oil to gas companies are up active now. One one can probably
16:35assign a reason to upstream oil and oil in particular because Jeffries has initiated coverage on a buy rating the target price of 390. A quick
16:42detour to my colleague Mika who Johnson with the key points of the note and then we get in Weber's view on the same. Good morning. What
16:48does Jeffries have to say. Yes it's initiated a coverage at a buy rate and at a target price of 390 rupees which implies a 47 percent
16:57upside to the previous close. Now one is the prospective pricing for crude. A tight tight crude oil market with the IEA also increasing
17:05its oil demand growth estimate for 2024 while reducing its supply estimate. Furthermore the KG based in production of oil and
17:14GC is not subject to the special additional excise duty which helps in terms of pricing other gas reforms in the gas sector in terms
17:23of annual hikes of the ceiling price. The flow prices and the new wells from the nomination feels being applicable to applicable to
17:32premium pricing will help the company. They've also estimated on GC's domestic production to go return to growth over FY 24 26. And
17:41they've estimated a 3 and 6 percent production can go for crude and gas over FY 24 and 26. They've also built on a 1 percent production
17:52hike for OBL. And this is assuming no resolution is met with in terms of the Russian assets which the company does plan to do in FY 25. And
18:00lastly they expect the net net cash position of the balance sheet to improve with free cash flow around 71 thousand 71 thousand
18:07crores in FY 24 26. And they also expect the net debt to equity ratio to fall from zero point three to X to zero point one six X
18:14over the same period. OK we got. Thanks for getting that perspective.
18:21But of the oil price upticks unpredictable. At best. But does upstream oil because of the reasons that Jeffries would have mentioned or
18:31otherwise does upstream oil become a sector that you would consider.
18:37I think you know from an oil and gas perspective of course oil upstream would kind of be you know variable to what happening from a
18:46geopolitical standpoint. But I think from a longer term perspective and as we move towards you know renewables are probably more
18:54focused economy from a gas perspective. I think again which kind of clubs gets clubbed into you know the highlights from the
19:03manifesto as well is focus on PNG focus on hydrogen. So those are the spaces where we would ideally look for opportunities going
19:13forward. As I mentioned I mean upstream from an ESG perspective longer term carbon reducing the carbon footprint perspective. Of
19:22course tactically it can pay you at this point in time because of what's happening from a geopolitical standpoint. But from a medium to
19:30long term I think our bets would rather go into biofuels gas hydrogen and so on and so forth.
19:36OK. Yeah. OK. There is also of course a specific reason why the gas based companies are active today. Section 11 directed which means
19:47higher gas demand and that could all be positive. Remember a lot of brokerages viewers also very constructive on gas authority of
19:54India for example. So watch out for the upstream oil and gas. Actually which brings me to one pocket a fund which has got an option
20:03to go long or short sit on cash etc. How constructive are you on PSU because.
20:12Not just banks which of course PSU banks have outperformed private banks since the start of covid maybe. But the other PSUs as well have
20:19kind of made wealth. A lot of people argue that now they are priced too much to perfection. Don't leave any execution risks.
20:27Car you know premium on the table etc. What's your thought.
20:33Absolutely. I mean I think why PSUs have rallied. They've done really well created a good amount of wealth. The valuations the way
20:43they have been I think the differential between a private company and a PSU company in terms of the valuation gap has diminished to a
20:51great extent. Now having said that I'm not saying that we should not be looking at in terms of constructive basis. The way we look at
20:58from our PSU basket is those companies who are beneficiaries of the structural reforms. These are these your commodities are
21:09cyclical place. The reform oriented companies which I did mention about earlier is the PLI made in make in India and something like a
21:18defense sector. Those are the places or those are the companies from PSU basket. We would love to have an exposure to as compared to
21:27those which are purely cyclical and more driven by the commodity cycles are something which we would probably avoid. So clearly while
21:36they have gone up there are still opportunities which are actually coming from the overall structural reforms which have kind of
21:45happened and where the government is kind of focusing on you know to create that kind of for the supply side is from an economic
21:55standpoint. OK. Take a moment to thank you for joining me today and giving us your thoughts. Really appreciate your time this morning and
22:03look forward to have you more often on the on the channel. Thank you very much. Pleasure to be here. Now the pleasure is ours. And
22:09viewers thanks for tuning into this edition of The Talking Point.
22:15We'll see you next time.