Ashok Leyland could be a contra buy in auto: Sanjeev Zarbade
A lot of IT stocks do not have much valuation except maybe Infosys at this level.
How should one look at IT? If you were to analyse earnings performance as a cluster, it is only paint companies and IT which have held out?
IT sector numbers have not been as bad as maybe some of the auto companies and some of the public sector banks. Except for banking and the retail sector in the BFSI segment, the IT sector revenues have been largely inline. But there was definitely a weakness in the BFSI segment.
The outlook is good but the EBITDA margins would be weak because of the higher visa costs and even the valuations are reasonable as compared to the consumer stories that we have in the market. These companies which have very minimal corporate governance issues should definitely be looked at. Also, the US economy which is the prime driver is on a good footing and so we are broadly positive on the IT sector. But a lot of stocks do not have much valuation except maybe Infosys which we find very good at this level.
Within IT what is looking good to you? What are you making of HCL Tech?
What we have seen so far in the IT sector is that in terms of the announced results, most missed revenue growth except Infosys. Also, almost all of them have disappointed on the EBIT margin front. The good thing has been that they have been able to crack some large deals and so that is something positive. Also in my view, with the domestic growth story being slightly on a slowdown mode, there could be some focus on export stories like the IT sector, wherein there could be some fund flow.
Also if the rupee, which has been very strong so far, starts to depreciate, that could be another tailwind for the sector. In IT, we are most positive on Infosys at this point of time.
What would be your preferred picks in the banking pack?
In the banking pack, the numbers of ICICI Bank were very good and we continue to be positive on the bank. On Axis, we have seen that the gross slippages have been much higher than what was expected and maybe some more pain is still left in the bank.
On Yes Bank, we are broadly negative because we have some structural concerns in terms of the way the business model will change in the future and how much cash they will require to fund it. Within the private sector banks, we are most positive on ICICI Bank. At this point of time, we are moderately positive on HDFC Bank.
When you say moderately positive, what do you mean? Should you wait for a little bit of correction before you buy or how should you approach that?
HDFC Bank has been one of the best performing banks and one of the best managed as well. It tends to trade at a premium to the peers in the private sector banks. Typically such good quality names can’t be had at very attractive levels on normal days. On a bad day, when the market has been very volatile gets sold off, one could look at buying these quality names. Also, we could probably buy HDFC Bank, not from a one-year timeframe but over a three-year, five-year horizon.
Do you think the time has come to buy the auto stocks? If yes, what would you buy?
It is very difficult to really call the bottom because there are no clear signs that the auto sector numbers have actually bottomed out. But in some stocks the valuations have definitely become quite attractive. So maybe from a contrarian point of view, we could look at buying Ashok Leyland where the valuations have also been quite beaten down, almost 9 times or 10 times forward earnings. Also the company reported very good EBITDA margin. That would be one stock that we could look at more from a contrarian buying point of view.