In an interview with ET NOW, Neeraj Deewan, Director, Quantum Securities talks about his top picks in midcap space, outlook for sugar segment and stocks that may do better going ahead in the market. Edited excerpts:
ET Now: What is your general approach towards midcaps given the current market scenario? Is it time to get out of midcap stocks and switch to largecaps as they offer a better margin of safety?
Neeraj Deewan: I would not advise anyone to get out of midcaps rather one has to be selective while investing in midcap and smallcap stocks. Definitely the management quality and the growth have to be taken into consideration before deciding to invest in any stock. Even after the market fall, midcaps have corrected a lot. A lot of them have corrected up to 25-30 per cent.
I will still stick to my investment thesis that at least 30-40 per cent of your portfolio should include midcaps because they are the ones that give you extraordinary returns when the markets turn.
Now is a good time to select midcaps especially the ones which have performed very well even in this downfall. These stocks are the ones that have been stable. One should definitely keep a small part of their portfolio ready to be invested again in midcaps once the tide turns.
ET Now: What is on your shopping list in the midcap space?
Neeraj Deewan: Stocks focussing more into domestic demand have gone up a lot and now they are correcting. Then there are spaces like the automobile ancillary space in which stocks like Jamna Auto were doing well because of the demand coming back to the commercial vehicle segment. So, now is a good opportunity to buy such stocks.
The real estate sector too is undergoing some improvement. Stocks like DLF, Indiabulls Real Estate can be looked at as there are talks about them becoming debt-free in the next six-seven quarters.
So we can look at real estate, commercial vehicle focused auto ancillary space, retail (Future Lifestyle) and textile stocks (Nandan Denim). These stocks have corrected along with the market correction and are domestically focussed. They are likely to gain with the improvement in the market and the results of the past four-five quarters of these companies have been pretty encouraging too.
ET Now: Going forward into the year, do you believe that outperformance would be restricted to some of the largecap names as oppose to midcaps because we know it is going to be a volatile ride this year?
Neeraj Deewan: I will reiterate that some part of your portfolio should have midcap stocks. Whenever the market stabilises, largecaps are the ones that start performing. Midcaps play a catch-up.
In the last two-three years of the bull run that we have seen from FY13 to now, we saw lot of midcaps giving you return of 10-15 times and even after giving those kind of returns on valuation front, these stocks are not that expensive.
For example, if you look at Avanti Feeds over the last four or five years, you will notice that even after rising 20-25 times in share value and the growth the company delivered on profitability front, at the return ratios of 30-35 per cent, the stock does not look very expensive. In the midcap space, you have solid well-managed companies, which have been performing well. One should not put all midcaps in one basket.
ET Now: The one lucrative pocket within midcaps has been the road EPC plays. Do you it is a pocket one could look at? Or do you think valuations and the stock prices have run up too much already?
Neeraj Deewan: The valuation in the prices has run up too fast in some of these companies. Even the prices of the companies that we preferred earlier, like the Sintex Infrastructure, JMC Project, have soared too fast and are not cheap even after the correction.
One has to be very selective while choosing these companies because most of them have healthy order books. We saw this in the last economic upturn too that order books became very healthy but then what happened was that interest rates started going up and execution became a challenge. This may happen again because interest rates in the next two-three quarters may start looking up.
One needs to be careful and select companies which have been there for some time. Companies like HCC and NCC have seen both up and down cycle; they have been in the dumps but are still standing. So such companies will be little better in execution.
ET Now: Are you willing to look at some beaten down banks or would you say that these are best avoided right now? Do private compounding stories like HDFC Bank or HDFC merit a buy on the corrections if and when they come by?
Neeraj Deewan: If you have a long term perspective of two to two-and-a-half years then opportunities in beaten-down PSU Banks may show up. Even the private sector beaten-down banks like ICICI Bank can do well.
With the NCLT resolutions and the exposure these banks are getting their issues might resolve in the next two-three quarters. So, look at this fall as an opportunity to invest in banks with higher corporate exposure. We have seen retail-focussed banks doing well and going ahead they may give you performance returns but I think better returns can come from corporate-facing banks though it will be a choppy ride. But if you invest with a perspective of over two years you will get better returns.
ET Now: Why do you think sugar sector is seeing so much correction?
Neeraj Deewan: Sugar sector has seen two good seasons and it is a cyclical industry. So with markets correcting people are getting scared that sugar’s two-year cycle is coming to an end and it may now see one-and-a–half to two years of bad cycle. This is why some of the selling is in sugar sector is taking place. Sugar prices which were going up earlier have stopped too. One now needs to be careful about this sector because we do not see three-four good cycles for sugar in a row and the sector may now consolidate. However, we have to wait for the coming monsoon to take a call on sugar stocks.
ET Now: What is your outlook on the real estate space? I believe you are fairly upbeat on select names – like DLF and IB Realty, what is the rationale here and why are those your top bets?
Neeraj Deewan: DLF is going through debt repayment and they have are raising money to repay the debt. The price slide has also halted and the stock is becoming more stable now. The interest rates are almost at the bottom and it is the time when demand can really start picking up with economy picking up. That is why DLF would be my pick. And Indiabull Real Estate is also retiring its debt. They plan to list the commercial rental arm and the residential arm separately. This move can create value because they have a good rental income from the commercial space. So once stability comes back in the prices a lot of these capacities will start getting consumed and things will improve on the operational front too.
ET Now: Do you think that the domestic flows into equity markets will continue to sustain?
Neeraj Deewan: Yes, I believe so. A large part of the domestic flows are coming in the form of SIPs and even when our clients ask us, we tell them this is a good time to increase the SIP allocation because you are supposed to invest when the markets are coming down.
Most of the investors must be getting this same advice from all the advisors. If SIP inflows persist the support to the domestic market will continue. Also there are hardly any other options where one can invest money right now. Even the interest rates are quite low on fixed deposits and fixed income securities. So, I think SIP and the support that we are getting from the domestic mutual funds should continue for some time. If the markets take a huge correction or see a long period of correction then you can get concerned about inflows from SIP but immediately there is no such concern.
ET Now: What are your views regarding the FMCG sector and how are you looking at it from a valuation standpoint?
Neeraj Deewan: I am positive on the consumer space and stocks like HUL, Godrej Consumer, Nestle and Britannia. I think ITC has been under pressure. Whereas in the other stocks you see a pick-up in demand and GST is also been of help to them.
When you see valuations I do not see too much value. I am not seeing merit in investing in stocks like Hindustan Lever or Godrej Consumer but there will be pockets like Britannia and Nestle where I think there is still some scope of improvement because there the return ratios are pretty good and they still have some scope of improvement.
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