I guess the litmus test is going to be out soon. The earnings season is coming up and we will start off with IT as always. Is another uneventful quarter in store for us?
Digant Haria: Yes, I think the IT stocks are not expecting anything big and they have a high base and muted guidance. There is this AI risk and also the US economy which continues to oscillate between hope and fear. It is a setup where even the dollar is not strong. So, IT will just do those technical bounces and technicals are a better way to play it right now than fundamentals because fundamentally there is not much to say that they will do great or badly or whatever. IT remains in a firm trading zone.
Other than that, the defence counters are holding well and we are seeing a lot of news trickling in. One of those stocks is BEL, which is seen to be hitting an all-time high. What is your overall take coming in on defence as a pack right now? Yes, there are concerns with respect to valuations, but how do you see the sector as a whole?
Digant Haria: This sector started its great growth journey from 2020 to 2023. The sector is still doing pretty well. It is growing at more than 15%; the good companies are probably growing at 20-25%. Order books are high. Sentiment is great. Defence spending across the world is up. So, whatever good can happen is already there. Old investors should definitely stay put and enjoy the ride for a few more years but for a new investor, it is always a point of discomfort and maybe that has been the case for the last two years. But, the old ones can enjoy the ride, while the new ones have to struggle and hope for a correction or try and find proxies.
For example, all the shipyards are trading at really good valuations. It is very difficult to say that you will make a lot of money from these levels, but people like us have no other choice but to find derivatives, like ship building involves a lot of welding activities. So companies which supply those welding materials, are proxies one can play on defence. But defence itself is very richly valued, and rightly so. And yes, it is difficult for a value investor to have a large stake in that sector now.
What is your take on what is shaping up when it comes to the paint sector? JSW Paints is acquiring Akzo Nobel and aiming to become the third largest entity within the paint sector. On the other hand, Grasim is saying that Asian Paints is abusing their dominant position, and trying various methods to keep their leading position in the market. CCI has ordered an investigation as well. How do you see the picture of the paint sector shaping up and what could this mean for the companies involved?
Digant Haria: Yes, it has been three years of pain for the leaders like Asian Paints and Berger Paints. Right from when Grasim and JSW announced their entries, the sector has been under pain and it is just a coincidence that even the category growth declined in those three years, from 10-11% sector level growth to 2-3% sector growth. So, growth is down and competition has increased. Net-net, see, the sector does not become as attractive as it was in the past decade, but we can say that probably the worst is over because one player, Akzo Nobel has sold out to JSW.
So there is one player less to contend with. But having said that, Birla Opus and JSW Paints still have to use their capacities and sell their products in the market. It will take some more time for the sector to start normal economics and when I say normal economics, it is 10% kind of a revenue growth and maybe 12-13% kind of earnings growth. Even those modest expectations are some time away. So, while we can say that a lot of these paint stocks would have bottomed out in terms of the price performance, it is not as if they have bottomed out. They will go up 30% tomorrow. For making returns, they have to wait for another 12-18 months. Asian Paints is known to have very aggressive market practices when it comes to distribution and when there is competition, these things happen. It is just what happens in the business side of things and yes, Asian Paints will probably pay some fine and the things will move on, that is what we think.
