On L&T
In case of L&T, there are two important aspects. a), The way the entire hydrocarbon story is playing out with crude price at around $50, that bodes very well for a company like L&T because 30-35% of its revenue comes from export markets focussed on the hydrocarbon segment. This can be one important trigger for the stock. b) As the economy revives. across the industries — be it cement or other segments, in both private as well as public sector — the capex story is starting. Having gone through such a big grind for the last three to four years, L&T could be an important player and the order book and overall margin guidance continues to be good.
Most importantly, people at institutional level would be underweight because of lack of capex so far. A combination of all these factors will prove to be good for a company like L&T and it must have a reasonably good allocation in the portfolio for next two to three years.
On midcap IT companies
The valuation gap is not so big between HCL Tech and Wipro and these companies’ people seem to like that because the delta for the earnings growth could be much better there. Typically when you see the momentum and the way the entire midcap sector is performing, there is an appetite for such names. We cover Persistent Systems where we are looking at 4.8-5% quarter on quarter growth. We have been liking L&T Infotech but the valuation has run up too much and we would not be comfortable buying into that. HCL Tech and Infosys are the ones that we prefer rather than buying some midcap IT companies at a valuation which is far higher than some of the largecap names.
On PSU divestment drive
PSU as a theme has done pretty well in the last two or three months. I am not sure whether it is entirely because of the divestment news itself because divestment candidates like BPCL or Concor barring maybe a BEML, have not performed well. Rather we have seen much better performances coming through from some of the other PSUs, whether it is a PSU bank or BEL and a clutch of other companies. So it is more to do with the fact which companies have less floating stock and where there are short-term triggers.
So in a company like SAIL which has seen a significant improvement in the pricing environment, the quarterly numbers could really surprise. It has done much better than the rest of the PSUs. We have been liking some of the oil marketing companies, particularly, IOC. We have been liking Bharat Electronics which has done well and where we are seeing positive traction and noises from the government.
But we have to also keep in mind that PSU may not be a structural theme per se. It might be just a tactical opportunity because of the better sentiment and at some stage we also have to exit. We can play these companies for tactical moves of another 10-15%.
On pharma
There are opportunities still to add more positions or buy afresh in pharma. Despite the fact that the pharma was one of the best performing sectors for CY2020, the earnings for this quarter or for that matter FY21 and FY22, it comes across as a sector that would surprise in terms of earnings growth in the range of 25-30% and even higher in some companies.
The overall visibility of earnings is quite strong particularly in companies like Aurobindo Pharma, Sun Pharma and to some extent even Dr Reddy’s. Lupin because of its recent incident with the US FDA, might see a bit of negative sentiment. Overall, within pharma both large cap as well as some of the midcap names may see some consolidation after a big up move as we saw in Laurus Labs, Granules and Strides Pharma. Once we have more clarity on further earnings upgrade for these midcap names, you might see some more interest. We would continue to have a positive view on the pharma sector and it would make sense to have a significantly higher allocation in the portfolio for next one or two years.
On financials
We have seen a decent run up in financials but the market would take comfort from the fact that the business updates are pretty good. The operating metrics of even large banks like HDFC Bank and smaller banks like IndusInd Bank, Federal Bank are looking much better in terms of the deposit and loan growth coming back into the system and that is a very comforting factor.
Typically banking being a high beta space, there might be some more momentum because of better expectations in terms of Q3 numbers. We continue to believe that the overall weight of banking will remain very strong and we are comfortable buying into banks like ICICI, Axis and even smaller ones like Federal Bank, AU Bank and Bandhan Bank for another 15-20% upside.
On preferred picks in IT
IT will do pretty well even this quarter. We are looking at a decent amount of upgrades in earnings and Infosys and HCL Tech are our preferred picks. Among midcaps, Persistent could be one stock which can really surprise with almost 5% quarter on quarter growth.
Also in IT, post this buyback, we should be looking out for floating stocks typically from investors who are looking from a short-term perspective. We have seen that in stocks like TCS and Wipro, the actual prices are higher than their buyback price which is a very encouraging trend for the IT space. We should have a positive view on the sector.
On FMCG
Hemang Jani: The focus would be on the recent updates from companies like HUL, Marico and Godrej Consumer where the indications are looking quite positive. Also, from a Q3 perspective, both in terms of the top line growth, volume growth and margins, we may have some sort of a surprise particularly from companies like HUL, Dabur and Marico.
After a bit of consolidation in the last two months, we have started seeing buying interest coming back and from that point of view, we would continue to have a positive view on HUL, Dabur and Marico.
On auto sector
The auto numbers which have come out recently have given a positive surprise in terms of passenger vehicle sales where Maruti has delivered a good set of numbers. The big takeaway would be the revival in the CV cycle and positive numbers that we have seen from Ashok Leyland and Tata Motors because the entire focus earlier was more on two-wheelers and passenger vehicles. We are seeing that as an important factor and one can look at companies like Tata Motor, Ashok Leyland, Eicher where the element of surprise continues to be on a much higher side and Maruti. These are the names we can consider from a Q3 perspective.
