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Hemang Jani on 4 spaces to hide in a slowing market

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Last Updated: Jul 16, 2019, 10.14 AM IST|Original: Jul 16, 2019, 10.14 AM IST
Hemang Jani-Sharekhan-1200


  • Valuation-wise there is a lot of comfort in IT.
  • No case for significan up move in FMCG in next 2-3 months.
  • Do not get too positive on pharma.
Some of the corporate lenders, cement and some of the domestic oriented construction companies, select pharma are the areas that one can really hide in the current environment when things are not looking too great, says Hemang Jani, Senior VP, Sharekhan. Excerpts from an interview with ETNOW.

Shareholders are getting a little bit disconnected with the overall market right now, given that volatility has been at a low, there is no decisive direction and every time we are talking to experts, the indication is that the undertone of the market continues to remain rather negative. What does one do at a time like this?
Given the slowdown that we are witnessing in the domestic economy and the quarterly earnings season, it is not likely to throw up many surprises. In that kind of a backdrop, it would be hard to imagine that we are going to have some strength in the market.

The only positive takeaway that we are seeing at this point of time is that you are going to have an interest rate cut both in the global economy as well as in the domestic market. That could bring about some element of positivity and if it is accompanied by liquidity flows, then you may have a bit of a stability as well.

As we are going to navigate this phase of slowdown, there are very few pockets to hide. Some of the corporate lenders, cement and some of the domestic oriented construction companies, select pharma are the areas that one can really hide in the current environment when things are not looking too great.

Will the bad get worse before it gets better? Are we in for a painful, grinding second half and is one better off raising 10-15-20% cash?
If you see the market trend, for almost 12 months, we had a few narrow pockets of companies delivering and that is where a large part of the money had got in and in the last couple of months, we have seen that even within that smaller universe you, we are seeing some bad numbers. So, the outlook is not turning good. For example, Titan within a span of about a couple of months, has brought down growth guidance from 20-22% almost to 13%.

In Indigo, we are seeing some news flow pertaining to management tussle etc. The universe is getting narrower and if the slowdown is more pronounced, then it is possible to see some further weakness in some of the largecap names.

The midcap and the smallcap universe has already gone through a lot of grind for the last almost 15-18 months. There may be a significant pain over there but for some of the largecap ones where the expectations were very high, if the quarterly numbers are not up to the mark, then clearly there is going to be some amount of profit booking or weakness.

What would be your preferred bet in the IT pack and particularly the tier-1 names?
The Infosys guidance was a big positive surprise for the market and we have seen the stock reacting. We have seen a decent stability in some of the global IT companies, particularly Accenture and a few others. The outlook has been quite good though they are also into the result season. That will be the broader trend we will get after a while, but we are seeing some positive news flow around the IT companies.

It is not as if because Infosys has upgraded, it is going to be a broad-based trend, but companies like HCL Tech, Infosys would have some positive surprise in terms of whatever growth expectations the market is working with.

For TCS, because of the kind of premium that it is commanding, it would be hard to really outperform and come up with something which is going to be really very positive for the market. So selectively, both HCL Tech and Infosys present a good accumulation opportunities for investors.

The entire buyback challenge, IT PE multiples were getting rerated because IT companies were in the process of giving cash back via the buyback route and that was leading to PE expansion. Would that not happen going forward also?
One theme which could play out well for IT is that when you have a domestic market which is slowing down, people look out for opportunities where there is going to be a decent amount of visibility and that is where the market would find some kind of comfort.

Also, what matters from an investment perspective is the overall growth outlook that you are looking at. Infosys management has clearly told you that they are looking at better days ahead and despite the consensus expectations being a bit muted, you have seen this upgrade. That cycle may continue for a while.

The US economy from a 15-18-20% kind of a growth, definitely is coming down but if you look at the performances of the global IT companies and the outlook in terms of tech spend, that is definitely looking quite okay, except for the rupee part where it is going to be difficult to take a broader call.

In terms of the business environment, IT stocks are looking okay and valuation wise there is a larger comfort over there. In the current environment, IT as a sector may play out to be a place to hide for a lot of investors.

How would you dissect the kind of market return that we have seen from RBL Bank? What are you pencilling in for the stock?
This stock has been one of the better performing ones over a one or two-year period though it is a smaller bank. In terms of growth, it was doing much better. The reason for the recent correction could be that there is a bit of a discomfort that investors would have in terms of the loan book. Because of the way things have panned out for some of the banks like Yes Bank, people have turned extra cautious when they are dealing with some of the smaller banks. That is why we are seeing a bit of a correction over there.

Overall, we like the stock and we would really wait for the quarterly numbers in terms of the asset quality and growth that we can expect. We continue to have a hold rating on RBL Bank, but yes because of the environment that we are in, it would be imperative to have a look at the asset quality and the growth outlook before we take an aggressive call on this one.

I have always admired what Ajay Piramal has done. He started his business as a pharma company, he moved into the retailing space, he sold his pharma business, he used that cash to create a financial firm and now we understand that soon he could be morphing into a fintech business?
The timing for entry into the fintech and the consumer lending part looks to be good. Most of the NBFCs are starved of liquidity at this point of time and if he manages to get a big investor like Soft Bank to invest into it, then it would be definitely a big advantage. Due to the developments over the last 12 months, stronger companies with a much better liquidity would be in a position to grow. From that perspective, it is looking good. But we also have to remember that after getting out of the Shriram Transport Finance, the kind of exposure that Piramal has towards the real estate and some of the sectors where things are not looking good, that part is still not very clear.

So yes, this kind of a news may bring about a bit of a cheer from a short term perspective but as a business model, we have to really evaluate how the entire composition is going to be between the newer business and the existing book quality that Pirmal is sitting on. We should be a little careful in dealing with this particular company at this point of time.

What do you think are market expectations from FMCG or consumer staples at this time? Are markets expecting disappointing set of numbers and could bad numbers hurt the market further? How much of the FMCG slowdown is already priced in some of these FMCG names?
Clearly from the previous quarter onwards, the expectations have been quite muted as you are seeing that the slowdown is far more pronounced versus the expectations of a revival in the rural economy etc. Across names like HUL, Marico or Godrej Consumer, the volume growth is not going to be more than 2-4% and in Godrej Consumer, the disappointment could be even higher.

The question is because these stocks have corrected in the last couple of months, and we have seen a 7-10% kind of a cut across the board, it is hard to gauge how much of the slowdown is already in the price but I believe that if the guidance and the management commentary is not very encouraging, then you might see a bit of a dull or narrow movement in these stocks. From a defensive perspective, some of the investors may find comfort in FMCG but I do not see the case for a significant up move over the next 2-3 months.

In the last three weeks, what has been the tone of retail activity at your firm? Are they buying more, are they selling more, what are HNI investors doing? Hemang Jani: See the retail sentiment and the activity is quite dull because incremental news flow, particularly post Budget, has not been that great.
People are looking out for certain ideas where there is an open offer or certain return opportunity without any open-ended risk that investors are very keenly looking out for. And unfortunately those opportunities are very, very limited.

Unless we see a bit of stability and some good news, I do not think retail participation in direct equities is going to be good. The only positive thing is that the SIP collection continues to be quite good despite the weak performance of the overall market. So, we continue to see a decent amount of participation through the SIP book but direct equity participation is quite dull at this point of time.

What is your take on the telecom space as a whole? Latest reports are indicating that Reliance Jio’s tariffs are underscoring the consistent share gains. There is a lack of ramp up in the post paid which could be advantageous for some of the other players within the space.
Overall, the sector continues to remain under stress because there was a hope that you will see a bit of a pricing uptick once Reliance Jio has already rolled out its plan and they have got the required market share etc but that is taking a bit of a time. Also, the fact that this entire 5G investment that the companies will have to make, one is not sure how it is going to be possible in the current scenario and that could put additional stress on their overall balance sheet.

So though the sector has remained dull we do not see a case for any imminent uptick in the names like Bharti etc because of these challenges that are there because of Rel Jio and overall competitive intensity.

What would you be looking at within the pharma space?
Clearly this upgrade has come after a long time. People have been waiting for some kind of return of earning visibility for the pharma pack. But if you look at the numbers, etc, it is not coming through and what is really important to note is that for some of the bigger companies, it is taking hell lot of time to resolve all these US FDA related issues. We have repeat observations and finally it is not reflecting in their overall numbers. So you may see a bit of uptake because of this upgrade, etc.

I do not think one should get too positive on pharma. We have been liking names like Aurobindo and Biocon which have been relatively better but the large companies like Lupin, Sun which have a larger dependence on the US markets, are still not out of the wood. So we are not too positive on those names at this point of time.

Aurobindo is US dependent. They have debt on their balance sheet and they have acquired Sandoz. At a time, when general markets are worried about what will happen to leverage companies, Aurobindo Pharma does have a debt problem to deal with.
Debt used to be very high at a point of time but in the last three years, the company has been trying to put their balance sheet in order. Also what is very important is that in an environment which is extremely difficult, market will be more comfortable buying into the names which have a better growth and in expensive valuations. So compared to a Sun or a Dr Reddy’s or Lupin, the growth that Aurobindo has delivered in the last two years has been much better and it is available at a 25-30% discount. That is making us a bit more positive on Aurobindo versus some of the other names and you have a decent visibility because there is not too much of an issue of US FDA, etc. The debt had been historically high but at this level we do not see there is any issue because of that.

We have seen shutdowns across the board. What would you suggest with regards to positioning within the auto pack currently?
The incremental news flow has been quite bad for auto for a while. Initially, there was a hope that this is going to be a temporary phenomenon and you will see a bit of a growth come back but that is not really happening. In the current environment, we have to reckon that wherever you see a bit of a stability and valuation wise if there is a comfort, it may make sense to buy from a medium to long term perspective.

From that angle we like M&M and Hero Motors where there is going to be a fair bit of a comfort in terms of valuations etc. But it may take a while for these stocks to perform till the overall growth comes back. For some of the companies like Ashok Leyland, Tata Motors and to some extent even Maruti, at least in the near term we do not see a reason why there is going to be a big upside because the overall slowdown is quite pronounced so these are the stocks which will continue to underperform at least in the near term.

Also Read

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