The entire specialty chemical sector and Deepak Nitrite particularly seems to be the clear favourite. For a sector which began its move in pre-pandemic days, is there merit in holding these stocks for the long haul or is a large part of the rally already in the price?
Specialty chemicals as a business looks very promising and in the last few months, a lot of stocks have done quite well. Other than Deepak Nitrite, stocks like Nocil, Navin Fluorine Chemicals, Atul Limited and Alkyl Amines — all have done very well.
My view is there are still a lot of stocks which are trading at a cheaper valuations to their peers and so there could be some uptick from here. Deepak Nitrite is one; the second one is Navin Fluorine. It is as good as a monopoly kind of a business in a listed space. One can look at Atul Limited. It is a chemical company which is available at very reasonable value. The stock has been almost 25-30% up in the last six months. The entire space has been buzzing since the last couple of quarters. My view is all these specialty chemical businesses will continue to do well in the next couple of quarters as well.
Marico has been talking about how overall demand has been better but the impact of the second wave will hurt their overall bottom line going forward. How are you reading into the overall business impact on the FMCG sector and on Marico in particular?
The Second Wave has not impacted much in terms of the closure of the business vis-à-vis the First Wave last year. For example, auto sales numbers are better than what the Street was estimating. I hear 75-77% of the numbers have been achieved vis-à-vis the year before last. This is an indication that though there is a business impact on the FMCG space, it is not as bad as what we saw in the last wave.
The entire space looks quite attractive and very promising. They have given a decent return. In the last couple of months, HUL,
, Dabur — all have done quite well. Emami is near their 52-week highs which indicates that the investors are very confident in the space. My top pick in the sector would be HUL followed by Tata Consumer and Dabur. All of them should give a 10-15% return from here.
What do you like from internet and product companies?
We do not cover any of the stocks but if I have to look at it today, then Tejas Networks looks quite promising. The stock has done quite well in the near term. One should be very cautious in terms of the way the stocks have done in the last wave. The valuations are quite expensive. It is difficult to gauge at this juncture but if I have to participate, I will participate on Tejas Networks from current levels.
Has anything come on your radar post the Thyrocare-PharmEasy deal? That in a sense has re-rated the diagnostic space. Does something like Dr Lal or Metropolis have some more headroom left?
I would still bet on Thyrocare. If you look at the way the Thyrocare model will be post PharmEasy deal, it will be an indirect way of getting into the larger picture going forward. I still feel that among the peers, there is a valuation gap between Thyrocare and Dr Lal and Metropolis. So some more money will be made in Thyrocare from current levels. I would stick to Thyrocare amongst the entire healthcare sector.
What stood out for you in June auto monthly sales data?
The lockdown during the Second Wave was not as fierce as the first one last year. The numbers were not encouraging but they were better than what we were estimating. Secondly, because of the lockdown, more damages can be seen in the two-wheeler space rather than passenger vehicles. The two-wheelers continue to remain underperformers. Going forward, for a couple of months, their numbers could be lacklustre. I do not see any major action happening in the two wheeler space. I would prefer going into a passenger vehicle company like Maruti or M&M.
In my view, Maruti is the best play. The monthly numbers are also robust. There was a fall but year-on-year, it was a drastic change. Similarly, in the case of M&M, the recovery in terms of rural economy plus the passenger vehicle add to it. My preference is Maruti and M&M. Thirdly, if I have to play the global passenger vehicle, then it is Tata Motors. So, these three passenger vehicle stocks should be added from the current levels and they should do well in a couple of quarters from here as well.
ET Now: The cement sector has seen very strong pricing power. How are you looking at opportunities within the cement sector?
Rahul Shah: We are seeing the next push in cement stocks. In the last couple of months, the pricing has remained quite strong, the demand has been quite firm. The last couple of months due to the lockdown could be a dampener in terms of the momentum but still manufacturing was going on and so there could be limited damage rather than what the Street was estimating.
There is the overall infrastructure thrust which is going to be led by the government and post monsoon, cement stocks should again come back to the radar. Midcap stocks like JK Lakshmi and Birla Corp are fairly discounted to largecap cement companies in terms of valuations. Those stocks should do very well and there could be a decent upside in the near term in these midcap cement companies.
What is your view on Happiest Minds?
The stock has gone up from Rs 350 IPO price to Rs 1200 in the last six months. The journey has been fantastic. If you are a three, four, five-year investor, then this stock can do much better from here also. From a valuation perspective, it looks very expensive. In the near term, there are other opportunities in the midcap space which are still trading at very reasonable valuations.
Going into the next quarter, what are you pencilling in when it comes to earnings and volume growth?
One clear winner is metals and steel stocks specifically. Steel stocks Tata Steel, JSW, Jindal Steel & Power, SAIL will have the best ever EBITDA quarter for the last 10-12 years. Steel is one sector one should be bullish on.
Second, I would continue to be overweight on midcap IT companies. All of them have done quite well. While Q4 was below estimates, Q1 should be better and that is what the Street is estimating.
Thirdly, there should not be any major disruption in the financials in terms of asset quality and wholesale bankers should be the top pick. My view is ICICI Bank, Axis Bank and SBI should do well going forward.
So these three sectors look promising in terms of the earning season starting in next 10 days or so.
