What are the top two-three ideas that you are recommending because the market seems to be crawling back and we are talking 11,000 once again on the Nifty. Is it time to buy?
Certain sectors selectively give valuation support as growth tailwinds are in their favour. Certain sectors are secular growth stories. Paper sector is something which has the tailwind of a cyclical uptrend. We are buyers in JK Paper and international paper APPM. These are the two leading paper companies on our radar where we have an interest on behalf of clients.
The other secular growth story which only gets better is the city gas distribution companies, namely Mahanagar Gas, Indraprastha Gas and the recently listed Adani Gas, which has been spun off from Adani Enterprises. For Adani Gas, it is still early days because they are yet to start operating in a meaningful manner, relative to growth opportunity.
They have bagged a large number of licenses in the recent round of bidding but a huge amount of capital expenditure will go on ground before they see that growth in form of revenues and earnings. But Mahanagar Gas and Indraprastha Gas remain quite interesting stories.
The third sector that we are positive on though the news flow is not very positive is the auto sector. The auto numbers especially on passenger cars in Maruti and two-wheelers Hero and Bajaj Auto do not appear to have created excitement in the market.
From a valuation point of view, if we were to look at the multiples, then Maruti at less than Rs 7,000, trades at about 16-17 times forward earnings; Hero and Bajaj Auto trade at about 12 to 14 times earnings which are cyclical lows. They used to trade at that level during the global financial crisis in 2008-09. On any whiff of numbers turning positive, the auto sector could outperform.
What would you avoid in this kind of market? Would it be metals? Despite the 90-day ceasefire between China and US, one does not know what is going to be the eventual outcome after these three months and how then metals would react to that eventual outcome.
We have a limited understanding of what could happen after 90 days. It is best to just avoid that sector altogether. There are enough domestic-focused sectors that one can focus on to find investment opportunities.
But coming back your question about what to avoid – it is a much easier question to answer. Avoid all companies which either have been misguiding on growth or not delivering on the promised growth, number one.
Avoid all companies which have either governance or balance sheet issues and that pretty much takes up a large number of stocks away from your focus list.
Also avoid companies which have either management issues, ethical issues or regulatory issues. There is a saying that the sins of the bull market come out in the bear market and what we have been seeing over the last six to eight months that not a single week goes without one company delivering some sort of surprise in terms of some wrongdoing or other in the last five years.
What is your perspective on IT?
I am positive on the tier I companies, especially TCS, Infosys and Tech Mahindra. They have been in a corrective mode post a stellar rally in the early part of this year on back of weakness in the currency. But these are terrific businesses which would give you long-term compounding with mid teens kind of earnings growth rate that can be sustainable over the next three to four years.
The stock price should be able to comfortably give you a very significant cash generation, free cash flow especially from TCS and Infosys and much of that 80-90% is being returned back to investors in form of generous dividends and buybacks. I think that will continue. They are in a corrective mode because of the strength in INR but from a long-term perspective, they continue to be accumulate on declines from a two-four year view.