We have had a bit of a mid-air turbulence in the market in the last couple of days. Do you think markets are stable now? Has the storm come and gone?
Dinshaw Irani: We have taken a very proactive call on the market saying that we believe that the markets are going to be fairly volatile. The turbulence will continue at least in the coming quarter. If it extends into the next one also, we would not be too surprised. So, basically, in the next couple of quarters, there will be a fair amount of turbulence. The whole reason for that is that we believe that starting from the March quarter’s numbers, we do not see them to be that exciting.

We have been talking to a lot of corporates and market participants and we have realised that there is a fair bit of weakness in demand in the quarter itself. In fact, the end of season sale started sometime in December itself. Normally, it does not happen that way and that really makes us wonder why there is inventory buildup. We realised that that is happening along the way and that is why we became cautious.

So, the March quarter numbers will be the first ones where after six consecutive quarters of growth, one may see some kind of cuts getting built into the earnings per se. Even the June quarter does not look that exciting. So, these are a few factors that have put us on a cautious note and that is why we are being a bit more cautious in the market.

When you say you are cautious, how is that different from your earlier strategy? Last year, when you bought into midcap stocks, you bought into consumer tech, fintech, at that time you were bullish, now you are cautious. Has your portfolio changed because of that?
Dinshaw Irani: Yes, it has. In fact, in the consumption space, quite a few changes have happened. We have reduced some weight and pulled out of some. But, in the consumption space overall, the weight may not look very different because there are certain pockets within hotels and tourism which looks very exciting to us. That is a space where we may have increased our weight in the interim as such and that is why overall there may be some replacement happening there, but that is a space that we remain fairly bullish on.

Do you think the elections being up next is pretty much par for the course? The markets have already assumed what the outcome is going to be. Is that going to be a continuity?
Dinshaw Irani: Yes, I think so. It is pretty much in the bag. One can keep arguing on the number of seats that they will be able to get. But the fact is it is in the bag for the ruling coalition per se. However, there may be some amount of disappointment or euphoria around that because normally it happens. Elections are one event that happens once in five years and there are a lot of rumours flying around, a lot of people giving their thoughts. So, it is going to be fairly choppy around that time also. However, do not forget that immediately after the election, the central budget is going to be presented sometime in June end or July beginning and we believe that that is going to set the trend for the next couple of quarters. Let us just keep our fingers crossed.So, let us say from April to July or April to August when the budget is not going to be out, how do you see the market moving?
Dinshaw Irani: The April quarter itself, April to June end or July if you will, is going to be fairly choppy and volatile. We are not looking at a big correction. But we are looking at quite a bit of volatility in the market. Frankly, when there is volatility getting built in, it is fairly wild. We saw that in February and March. That is when you want to have a slightly lower beta in your portfolio. So, you try and fall less, but try and capture the upside to an extent.

So, do not be so low on beta that you are not able to capture the upside too. So, partake in the upside, but try and conserve on the downside because once you conserve on the downside, there is no parallel. Whoever is beta one plus will never be able to catch up with you there. So, that is the kind of portfolio we are trying to develop out here and that was the main reason why we brought out a balanced advantage fund because we wanted to have a low beta offering which can be easily managed, the beta in that portfolio can be easily managed by way of balancing your equity exposure.

While in a long only, the only way you can balance is by taking on the high beta names and remaining there. That way you have to be invested. That is the reason we brought it out like that.

What are you doing to your industrials and what are your positions in power stocks? In largecap industrials, you have some of the power generators in your portfolio and they have done phenomenally well. Certain sections of the market now believe that since the stocks have done very well in the last almost one year, they are baking in a lot of positives that lie ahead. Are you booking profits there as well?
Dinshaw Irani: By the way, we have only one power generator which is in some PSU. So, the one call that we have taken is that if the government is focused on, the next Budget basically, the call is focused on the capex cycle and infra play and they are going to spend a lot on defence and stuff like that.

One way of bringing in the money is through divestment and that will be an easier way for them to do that and that is why we believe this is one area that you need to. So, not only power utilities, we are also into oil and gas companies. We have upped our stake there in this recent volatility. We added to those names because that is the call that we have taken.

Even after this run up, there is a fair bit of value left in the PSUs and that is why we remain there. In fact, we increased our weight.

Are you revisiting IT because most of the IT companies are now saying the worst is over, order book has started, valuations are not that stretched?
Dinshaw Irani: No, definitely not. You saw the Accenture results and their guidance also. It was obvious that everybody is missing the wood for the trees. There is a structural issue here. There is a fundamental issue out here and if you had heard the sound bites from that analysts call that they had, normally a management does not says things like, we are having a tough time closing deals, it is taking much more longer, the smaller deals are off the table totally, we are only talking about big transitionary deals and stuff like that which is mainly back-ended revenues. You do not hear that sound bites on the regular call if it is a bullish call.

So, it is obvious that there is an intrinsic problem tere and that problem cannot be solved mainly because the interest rates are getting cut. Because if the interest rates are getting cut in the US and they are getting cut aggressively, we are quite clear that there is a slowdown happening in the US and that is why they are getting cut. The smaller deals are the ones which are the discretionary ones and those are not happening. But that is where the margin is.

Anyway, we can make out from the kind of manpower hiring happening in the IT space that hardly anything is happening there. It is obvious that they have issues and frankly our analysts are becoming more bullish on the companies or the stocks I suppose.

Are there any other pockets where you are a little cautious right now, especially when it comes to small and midcaps?
Dinshaw Irani: The one sector where we have been fairly cautious all along has been IT. FMCG is another space where we have been very cautious because we believe that there is going to be a fair bit of pressure. Though they have already enjoyed a fair bit. In fact, if you remember the third quarter numbers, December quarter numbers, the top lines did not grow at all. It was just margin expansion which supported them and they were still disappointed. That also is out of the way now. March quarter will be one where we will see a large bit of disappointment building in.

Paints is another sector where we have been fairly cautious all along and that is proving to be right. In fact, in our long-short portfolio, we are in fact short paints. So, these are a few sectors where we have been cautious. Even in the consumer discretionary space, there are pockets and in our portfolio, we have taken out names which are in the apparel business. So that is out for us. Again, the white goods business is not doing too well. So, these are the few spaces where we have been very cautious and which have been avoiding.

You bought into oil marketing companies, I distinctly remember. Is that trade still on?
Dinshaw Irani: Yes, definitely on. In fact, as I said, we in fact added to the names on the correction built in and we are very comfortable here. In fact, even that Rs 2 cut in petrol price. it was mainly to get them in line with their long-term averages on the margins per se. I mean, historically, the regular marketing margin that they had was around Rs 3. They were earning around Rs 6 odd as such in margins and obviously, the cut was to get them in line with those margins and that is what we realised.

We said, okay, now it is not about pandering up to the election season per se, but it is mainly to get them back into regular business mode. So, they were allowed to earn these windfall margins just to make sure that they pack up on their profits per se before they take a cut because they did suffer earlier as such. So, we are very comfortable here.

In IT, there is a problem. But if I look at AI and look at what is happening to Magnificent 7, how does one translate that rise or the kind of market cap some of the Magnificent 7 stocks are commanding for Indian investors? Is there a correlation?
Dinshaw Irani: The fact is, these Magnificent 7, apart from the chip manufacturers, are mainly platform companies. We are known for IT service rather. It is not a platform as such and mind you, even in those Magnificent 7, the ones which are into AI have done phenomenally well.

In fact, this year to date, only three or two of the seven have participated in the rally which has happened in the S&P as such and that is mainly because of their AI focus per se and that is what I think is driving the world forward. Our belief is very clear. We are very gung-ho on AI, but our domestic plays are too much back in time on AI. That is why it is not exciting us today in the domestic space, but our offshore fund has really partaken in that rally.