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Mahesh Nandurkar on how to play consumer staples, telecom and new age tech cos now

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“We have seen now the benefit of tariff hikes taken by the telecom companies now largely reflecting in the ARPUs. It is now completely there in the numbers and so we would be looking forward to the next round of tariff hikes,” says Mahesh Nandurkar, MD & Head of Research, Jefferies.

What is your outlook on some of the new age tech stocks? Would you be of the view given that the companies are taking a lot more cognisance on their path to profitability and not just cash burn, it is being viewed as positively by investors. Is the tide definitely turning here?
I would not really take a very broad brush approach in that sector as such but yes, selectively what you are saying is right. Some of the companies are taking a path to profitability or revise down the loss guidance for this year and the next year.

But we also have to wait and watch as these companies focus more on profitability and reduce the loss guidance and how that is going to impact growth because ultimately that is also going to be very important. Despite the correction, many of these stocks still trade at very high multiples and those multiples can be justified only if we can be sure about the long-term growth trajectory. So yes, a fine balance between path to profitability without really giving up too much and they have to give up something but without giving up too much on the near term growth. Both these factors we have to keep in mind. There are one or two names that look interesting.

Read Also: Why Jefferies' Mahesh Nandurkar finds the market rally unconvincing

After the recent correction, are Indian domestic internet plays getting a little more attractive?
Yes, that is what I said that a few select domestic internet names are beginning to look interesting. And as I said, greater emphasis is being given on the path to profitability and that will come at the cost of near-term growth but not a whole lot. That balance needs to be maintained but yes, a couple of names are looking interesting in the domestic Indian internet space.

You have said that Nasdaq has started outperforming S&P. Now that interest rates fear at least globally is getting averted. Do you see a shift back to all other growth stocks as well because if cement, materials and energy pockets are taking a back seat, could this be back to the market we saw in late 2021 or early 2022?
Clearly with the Nasdaq beginning to move up, we are seeing some sort of success in containing inflation. That brings the investors towards the slightly more expensive stocks as well. But I think quality is still going to be paramount and that is also one of the reasons why we have been raising weight in the consumer staples.

Most of the last 18 months or so we have been running with a very big underweight on that but now we have raised that sector to neutral because while the multiples are still high, I think consumer staples is a sector where we still get growth visibility and good quality management and ROEs. I believe that if we are looking at slightly turbulent market conditions over the next three to six months, we might get some negative surprises on the rate hike front by the Fed or on the inflation front by the Fed.

The staples companies will probably be a good place to hide because it also looks like the worst in terms of the commodity price pressure is now over and the June quarter result season broadly captured the impact of those higher commodity prices. Maybe some will be seen in the September quarter as well but broadly it is over.

What would be the view on the telecom space? We have seen some numbers come out; the spectrum auctions were hotly contested. What has been your assessment?
That is again a sector which has done reasonably well over the last couple of years and I would broadly categorise it under the broader umbrella of the utilities sector on which we have an overweight. On the telecom side, one of the sort of keenly watched events was the 5G bidding auctions which is now behind us. Going by past experience, worry remains whether the players will end up bidding too much but thankfully it was not really the case. By and large, it was pretty much on expected lines.

One risk factor is now behind us. We have seen now the benefit of tariff hikes taken by the telecom companies now largely reflecting in the ARPUs. It is now completely there in the numbers and so we would be looking forward to the next round of tariff hikes. I think that will be crucial to keep the sector profitability at the higher levels and to meet the analyst estimates because that is what the analysts are forecasting.

So yes, we would need to start to see some movement on the tariff hikes once again, in a quarter or two and we are hopeful that this will happen. If that does not happen, then we will need to take a relook.

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