“In the case of new-age tech stocks, the longer-term outlook will continue to depend on how these companies execute in their respective domains and there some of these market leaders will do well, not everybody and in some cases, business models are still suspect and yet to be proven,” says Pratik Gupta, CEO & Co Head-Institutional Equities, Kotak Securities.
Are you enthused by the commentary that we are seeing from new-age tech companies? Everything from with a completely changed focus or for that matter even earnings from and over the weekend?
What has changed is that given the global increase in interest rates and tighter liquidity, even in India in the private markets, we have seen capital being less freely available and we are seeing competition waning and that actually works to the listed players who have already raised capital and who are in a leadership position in their respective sectors.
Therefore, we are seeing the commentary around a greater focus on profitability and cutting the cash burn. So, that is a positive. For some of these stocks, in the short term, we have to remain concerned about the potential technical factors like paper supply from pre-IPO locked up investors who may come out and sell but that is frankly more of a near-term concern.
The longer-term outlook will continue to depend on how these companies execute in their respective domains and there some of these market leaders will do well, not everybody and in some cases, business models are still suspect and yet to be proven.
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But in some of the consumer oriented names, there is potential for more upside. But bear in mind that while these are high return stories, potentially these can give high returns. The risk is also quite high and this is not for the investor with an average risk appetite. These are quite risky stocks given that they are not profitable as yet. The net profit level is a long way to go, cash burn is still high and competitive intensity could increase going forward. So a lot of execution risk is there but in general, we have seen these companies become a lot more focussed on profitability and step up their investor communications in a couple of cases. So that helps.
In the near term, all this excitement about Indians chasing SUVs and the auto divisions of most of the passenger car companies are already in the price, while they continue to grapple with commodity costs not having fallen enough and supply side issues still persisting?
In the auto sector, one cannot make a broad brush statement. Different segments have different drivers. But in general, our preference has been the commercial vehicle sector and the SUV sector but obviously there are no direct plays other than for commercial vehicles.
But in general, the point we have been making is that over the last few years, this sector has been impacted by weaker demand or chip shortages, supply issues and so on. The worst over there seems to be over and on the positive side, the worst of the raw material price issues which these companies were facing in the last 6 to 12 months is also over.
Going forward, it is an issue of valuation and also earnings growth prospects where earnings upgrades are likely to continue for some of these companies. In particular, we are more bullish on the commercial vehicle and SUV plays.
On the passenger vehicle side, some of the best of the upside in margins and in volumes is already priced in. Valuations are no longer attractive. So on a relative basis, we prefer the commercial vehicles and the SUV kind of companies and maybe some of the tractor companies. But in general, the auto sector was one sector which we had for the last two years or so. We have been cautious but this year we have turned quite bullish and we still like it from a longer term perspective.