Where would you focus your attention in the market?
People are evaluating relative valuations and as a result, different kinds of moves are happening within a sector. If we look at the largecap basket as a whole, we can see that some of the consumer names have corrected in the interim while most of the other sectors have continued to move up. As I look at the valuation paradigm and the evolving economic outlook, there are three-four stocks which still offer value on the largecap side with an absolute return perspective over the next one year.
One such stock is Bharti Airtel. Fundamentally, things are improving a lot and technically we might have this flow factor coming in with 100% FDI being allowed and they are gaining market share. Stocks moved up a bit over the last few days. It still has an upside potential and it could surprise in terms of earnings because of interest cost savings and the uptick in pricing.
The second company where we have seen a steady improvement in order flows has been Larsen & Toubro. They are announcing significant order wins at a time when these were not expected. My guess is they will outperform in terms of order booking and next year they could outperform in terms of expectations. Again the stock has done well in the recent past but from a historic perspective and looking at the overall market, it should still be able to do well.
The third stock is DLF. It is something which I have talked of earlier. I believe that a clear revival is happening in the real estate sector. Companies with strong balance sheets will benefit. There could be midcap players and on the largecap side we have DLF. It is significantly under owned. There has been a steady improvement and the results will play out over the next couple of years. It still has return potential.
What about the defence stocks?
Defence as a story has been playing out and the recent trigger has been the Tejas order which benefits the entire ecosystem. Bharat Forge has moved because of improvement on the CV side, the class 8 truck orders in the US as well as expectations that on the defence side, they will get more orders. Normally, I would not like to play PSUs but we have talked of Bharat Electronics several times. The stock has moved up 30-40% already. But on a pure growth perspective vis-à-vis the current valuation, it still has value. That is one play that is clearly there. Beyond that, we need to evaluate more about which company benefits more, but Bharat Forge is one clear play.
What is the outlook on RIL given the fact that the stock has come off quite a bit? Does the long-term story look intact?
In stock markets, companies outperform expectations when there is less hype built up. A huge hype was built around Jio platforms last year without most people understanding what is in it, what are they going to do and there was an assumption that Jio as a mobile operator will continuously keep on increasing their market share, which is also not panning out in terms of JioMart. In terms of the e-commerce venture also they are lagging behind as easy money and easy availability of equity has made the players who were already present, even stronger.
The expectations from Reliance are very high. They need to deliver. As to whether they will be able to deliver or not, the jury is still out. I would wait it out. I would not be a buyer in Reliance at this point of time. Obviously, if the overall market moves up, Reliance will also move up but I do not see it as an outperformer given the fact that the expectations are still very high.
The news of government sanctioning that procurement of fighter jets for the Indian Air Force has been quite a booster shot for HAL, BEML, etc. Does this space interest you?
Yes. It is a space which obviously should do well because that is where the government has been acting. The defence indigenisation has become a reality. Order flows are happening to companies in this sector — both private sector and public sector — and to that extent, the Tejas news benefits HAL. I am not sure whether BEML benefits or not but Bharat Electronics benefits because of the overall story. The defence story will keep playing out. We need time to buy the stock. In general, I do not buy too many PSU stocks but in the defence plays, these companies should be able to do well.
What about OMCs?
I do not consider OMCs as a play at all. There has been a rally in crude oil prices and the price increases on the retail side have been happening with a lag. From the ruling party perspective, we have the West Bengal elections coming up. I do not think they will want to see Rs 100 petrol price before that because it will create a significant negative connotation. So interventions in free pricing sours the story and that is the reason why BPCL is not attracting any significant suitors from overseas.
Till it is a total hands-off in terms of pricing, this sector is going to have a tough time and I do not think that beyond trading bounces, there is any story there at all.
What is your view on the road ahead for the auto sector?
Autos is an intriguing story in the sense that there have been many fluctuations with different segments doing well at different times. Initially, we saw an up move on the two-wheeler side. Now that has stagnated and the growth has stalled. Among cars, we saw a pickup happening in passenger vehicles and that has sustained. Now we are seeing a surprising pickup in the commercial vehicle side which is actually quite surprising to me because a lot of fleet operators still talk of a lot of idle capacity but still the demand has come up. New players could be coming in or maybe the financing is so cheap that people are replacing their old fleets etc, there are several explanations for that.
But the big issue the auto companies are going to face is on the input cost side. We saw a margin increase despite volumes not being as great earlier. We could see a reversal happening now. There could be some uptick in volume growth but profitability will come under severe pressure given the way steel and other commodity prices have rallied. And that is the issue, as investors, we have to grapple with in terms of auto companies. The valuations are no longer cheap and profitability could come under strain. This is not the right time to invest in auto stocks in general.
Would you look at some of the PSU names selectively and if so, would you stick with an SBI or look further?
I am not actually buying. SBI has done well for itself in the recent past after a huge phase of underperformance and I believe that some pick up happened after Karnataka Bank reported last week that there was less stress on the balance sheet than people were expecting. That has led to a rally in the corporate lending banks.
I believe that some of these PSU banks are still very cyclical. They are prone to periods of high NPAs and there could be some further trading up move but any significant up move is unlikely unless and until we see a totally different scenario in terms of the expected versus actual NPAs and the inflationary outlook.
What exactly are you making of the aggressive divestment target that the government is likely to set?
It is an every-year story. They set up an aggressive target and then they are not able to meet it. That I think is the feature of the entire disinvestment story because it is not strategic and wherever they plan strategic disinvestment, it gets delayed for some reason or the other. That is the big issue with the entire disinvestment strategy. It is a good figure to quote, to show lower than what will actually be our fiscal deficit. So, they will give a huge target which they will not be able to meet. If they meet it, it is great for the government and the economy, but I would be very sceptical.
Are you sensing opportunity within some of the midcap pharma names?
We have to wait for a cool off because the data coming out in terms of the overall pharma sector shows a huge growth coming. In the first couple of quarters, many pharma companies saw an uptick in margins because the raw material supplies in terms of inventory were there and the final product prices moved up. So, they had that margin cushion and that is actually reversing.
Some of the companies, which I have talked to especially in the chemicals and in the API space, are indicating that the increase in input cost prices have been very severe and the impact of that is something we need to watch. The rupee has also not been very supportive of the pharma exporters.
We need to watch the impact on margins and if there is any negative surprise in the companies which are on the watch list and those stocks correct, that will be the opportunity, not right now.
