What to
do with growth stocks, PSUs, and legacy blue-chips in the portfolio on return
to pre-covid-19 normalcy
If 2020 was
the year of triumphing adversities, the New Year will be a period of
introspection. Priorities will change as life gradually returns to the
pre-covid-19 normalcy. The vaccination coverage is set to encompass the globe
by the first half of 2021. Multiple products will compete on effectiveness and
price. The challenge will be last-mile delivery. It is likely the entire
western world and the prosperous nations in Asia will have completed the
exercise entering the second half of the year. Equities’ rebound from the
bottom anticipated the pandemic coming under control eventually. The
record-breaking spree that followed is accounting for growth. The question is
if the economy, hobbled by disruption in supply and distribution chains, has
the stamina to sprint. The aim of the monetary and fiscal packages was to tide
over the temporary slump in business. The outcome has been lopsided
consumption. The shopping cart predominantly comprises food, hygiene products
and utilities. Emerging from the medical crisis, the possibility is that demand
for discretionary items will explode. The stock market is already visualizing
such a scenario. Traditional industries are attracting attention for their
tested business models as against the in-flavor tech providers with plenty of
promise at high discounting. Buying is shifting to mid and small caps as
investors wrestle with slowing returns of large, safe bets and untapped upside
of promising risk-takers.
The problem
is producers of non-essentials have absorbed the major impact of lockdowns.
Capital expenditure has been put on hold to conserve cash. They might be not in
the best of shape to meet the release of spends. The return to Old Economy
boosted crude beyond US$50 in December, indicating inflation is gearing to recoil.
Many manufacturers have taken a hike in prices beginning January. The Reserve Bank of India will not be
comfortable with consumer prices beyond 6% and the Federal Reserve will be
happy if the 2% target is breached. The rollback of liquidity will begin.
Investors’ dilemma will be whether to ignore the pressure on the margins for
top-line growth. Companies balancing the pull of revenues and the pressure of
higher input costs will see valuations soaring. Obviously, they will be at the
top of the market or have a unique presence without comparable peers. In the
crosshairs will be banks, expecting improvement in demand. A series of
interventions has insulated them from the effects of the infectious outbreak.
The central bank allowed one-time restructuring of non-performing loans. The
Supreme Court put off recognition of bad assets after the end of the six-month moratorium
on servicing. Dear and scarce money will test the mettle in managing slippages.
It will be
make-or-break time for PSUs. They have
lagged in recovering from the March lows. There is no clarity about their
future. IPOs used their monopoly as a bait. Many have minimum public float
required to stay listed. Yet they are constituents of benchmarks because of
their size. The opening up of practically the entire economy to the private
sector has erased even the scarcity premium. Attempts to extract whatever juice
is left through offer for sale in dribbles is worsening their plight. The Union
government is squeezing cash from those quoting below book value through
buybacks. Profitable enterprises have been told to ramp up dividends. The
shareholders will have to decide between cutting losses and waiting for
strategic sale, triggering an open offer, to unlock value. Some legacy holdings
in the private sector, too, are evoking mixed feelings. Besides their foreign
lineage and professional management, what is common between HUL, ITC and
L&T is their mediocre growth record. Their five-year CAGR in revenues is in
single digit and profit in teens. Ex-core competency contributors, tech and
financial services now make up nearly 60% of infrastructure player L&T’s
turnover. Branded foods, personal-care offerings, apparels, hotels, farm
products and paper together consist 55% of cigarette maker ITC’s sales. HUL seems
to be ceding space in the hygiene category in favor of the discretionary
beauty- and personal-care portfolio, comprising 56% of the profitability.
Risk-averse investors looking for longevity and transparency have a difficult
choice: A pricey fare whose valuation seems to derive from sticking to being a
play on its sector, a chameleon running helter-skelter, with over 30
subsidiaries and associates operating in diverse industries, to overcome its
identity crisis, and an ageing thespian trying to be trendy by injecting the
growth elixir of happening sectors to experience the adrenaline rush.
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