What are the opportunities within the auto, auto ancillary space? What about Bharat Forge?
Auto, auto ancillary space in general is a medium-term cyclical where whenever growth recovers and whenever the demand picks up, we see good recovery. As of now, the penetration in India is fairly okay but with the rising affordability and post Covid trends or personal mobility, the auto sector is very well poised for a better recovery. In the next two to three years, we expect a much stronger recovery in the auto cycle because the last two years from FY19 to FY20 and even so far in FY21, have been a bit weak due to various factors like emission norms, price rise and slowdown in demand.
Going forward, post Covid, with personal mobility picking up and the base effect being benign, these sectors and stocks are poised for a very good run in the medium to long term. Auto ancillaries also service the domestic part of the economy where in terms of two-wheelers or four- wheelers, we are more positive. Many of the auto ancillaries are servicing these and some of them also have a replacement demand and these should do very well.
Would you be a contra buyer in any of these beaten-down sectors like multiplexes or travel and tourism or aviation?
Multiplexes are up because the West Bengal government has allowed to operate multiplexes with limited audiences of around 50. As we are having a festive season in October and November, there is an expectation that other state governments also could follow the trend and this bodes very well for the sector.
Recovery is happening in sectors like airlines. They now operate almost 1,400 flights daily compared to the average of 4,000 flights earlier. So the recovery in most of these sectors has been around 25-30% whereas the general economy — whether consumption or investment or industrials — have experienced almost 80-85% recovery from the pre Covid levels.
In the next six months to one year, the recovery — be it multiplexes airlines, hotels and hospitality — could definitely go towards 80-100%. Currently, the earnings are very depressed for these sectors. In the medium term, it will pick up substantially.
So one needs to understand what kind of expectations one has for the earnings and whether there would be stronger recovery but in many cases, the valuations have also run up in anticipation of strong recovery. One has to be very bottom up and selective in picking up stocks in these sectors. Also, one should play for the long haul, not for the near term.