In an exclusive interview with ET NOW, Agrawal said Calendar 2021 could be the year of clean performance built on the debacle of 2020, but said it is important to stick to leaders across sectors.
He finds cyclicals such as auto and cement interesting, and believes smaller banks can offer huge returns, though they are vulnerable as well. He sees re-rating opportunities in PSU stocks. The Covid-19 lift for IT, he said, is not fully understood. It is one sector where value migration will happen rapidly, he said.
“A day is followed by a night, and the night by a day,” Agrawal said, indicating that the first quarter 2020 was a nightmare when Covid-19 turned out to be the biggest risk that nobody ever thought of.
“The fear picked up in March and despite vaccine rollouts being sometime away, that fear is much lower today. Deaths in India have come down to 300 a day and positive cases are rising at just 18-19,000. I think the bulk of the Covid crisis, physically, has been contained, at least in India. Fear is at an all-time low now,” he said.
The Joint MD and Co-founder at Motilal Oswal Financial Services said deep value stocks are trading at low valuations now. If one believes there is a mis-pricing in stock valuations and expects a company to come back strongly, s/he should buy that stock even if there is some delay in vaccine rollout.
“The problem is, some beaten-down names may never be able to come back,” he said.
Agrawal said if the government comes out with more fiscal measures and RBI keeps the monetary policy where it is, and use the ongoing crisis to align and build on the momentum by, say, announcing PLI schemes — all the weaker banks and smaller banks would have better times.
“Smaller banks are so beaten down that the percentage gains could be huge. But if the economy fails, these banks would be vulnerable, as their margins are small and credit cost would spike,” he said.
Agrawal said he sees deep value in cyclicals such as cement and auto. The future belongs to all the established auto players in India, and existing players are likely to now step up EV (electric vehicle) push.
Agrawal said wealth creation is happening in the midst of major volatility. He said successful companies have grown to unimaginable levels in last 25 years. At the same time, only 100 companies beat Sensex’s 9.2 per cent return for this period. Raamdeo said new companies now make up as much as 50 per cent of BSE market capitalisation.
On returns expectations from strong franchisees such as Asian Paints, Nestle and Pidilite Industries, Agrawal said if the economy grows at 7-8 per cent, these companies would grow at, say, 18-20 per cent. “But if the economy grows at 4-5 per cent, even these wonderful franchises could not create opportunities on their own,” he said.
Agrawal said many PSUs can become attractive options post privatisation. He said strong value migration could be seen in IT. “The Covid impact on IT is not fully understood. Its impact would be seen in the years to come. The pace at which corporations want to digitise their operations and work from anywhere would change the cost structure and would impact scalability and size of opportunity for the IT sector. I would call it Y2K II,” he said.
A migration would also take place from public to private sector banks, he said. “The loss of market share from public to private banks would be steep; they have already lost one-third of market share in the last 10 years,” he said.
Stock returns are slaves of power and earnings, the market veteran said, suggesting that investors should view FY21 as a blip.