Bet on agrarian theme as rural economic recovery will stand out: Mukul Kochhar

‘We have had a very good winter harvest this time’

Impact of the pandemic on the rural side will be very limited as the social spending the government has been doing is very high, says Co-Head, India Institutional equity sales, Investec Capital Services.

What is your take away from the kind of move that we have seen in the market and at these levels, what would you actually have in your portfolio as a preferred name?
The move is in response to the opening up of the economy or rather the attempts to open up the economy in certain parts of the country. The expectation or the belief was that the Street was actually waiting for a stimulus programme from the government but the reality is that the government is very constrained when it comes to providing any stimulus. The actual action is going to happen around how we open the economy. Just to give you an example. Auto sales in April were zero. As you see these numbers improving, you will see some action, especially in the cyclicals which are beaten down.

Another small point here is, if I look at Nifty valuations, it has pretty much become a barbell now. There are certain companies which are expensive right now related to its historical valuations and earnings. They pretty much discounted any Covid impact and there is a larger section which is actually cheaper; in the cheap range is where all the cyclicals, banks, refineries and metals companies lie. There is literally nothing left in the middle now; it is either expensive or cheap. As the market opened up, the cyclical components that had become very cheap started rallying and that is what you saw. The first phase will just react to how the economy opens up and then the actual earnings impact which will probably start pouring in October-November and that will determine the more sustained reaction.

Wipro has been the one IT major that has perhaps seen the most flux in terms of management and also getting back on track as opposed to others. What do you make of this change at the top?
Wipro has been an enigmatic IT services company for a while now because of the churn at the top. It has always had a lot of potential. It is a large IT services company; so if it executes things well, it can do well. But they have been unsettled for more than a decade now. They have tried having a Co-CEO role that did not work out. It is a good move. Getting somebody from a global strategic company to pull the company together gets them firing in the same direction. Maybe this works but they have been experimenting now for 15 years and that is reflecting in the valuation and stock performance.

The agrarian economy is showing signs of recovery. Agrochemical stocks, two-wheeler companies and tractor stocks are all looking up. Is there merit in buying this agrarian theme?
Everything has to be put in the context of valuation. What we have been debating with clients is that on the rural side over the last four-five years, the social structure or the social spending that the government has been growing is so high that the impact of the pandemic over there will be very limited. You have free electricity, free healthcare and free education. Now food is also being provided free for a period of three to six months. We have a well-established PDS system. You have old age pension and widow pension. There are so many programmes benefitting the rural poor. I am not saying they will be living a life of luxury but the impact the migrant community or the migrant poor had is not really evident is rural.

The most important aspect impacting rural every year is how the crop goes and there you have a very-very good winter harvest. Honestly speaking, the rural economy will be a standout and some of the stocks are reflecting that. The second part is how far you can take this trend. We have been pushing Hero exactly because we were expecting some of it but today Hero is actually up and has pretty much caught up with the entire fall. As this section of the market which is now becoming fairly valued to expensive and even discretionary stocks like Hero or rural-focussed discretionary stocks get into the category, it will become a difficult push purely owing to valuation even though the fundamentals are less impacted.