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Market betting on growth, not m-caps, for giving robust multiples: Pankaj Pandey

ICICI Direct research head explains stand on YES Bank, Zee, Biocon & more.

ET Now|
Nov 27, 2019, 11.24 AM IST
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Rather than looking at largecaps or midcaps as a basket, it is a very stock specific market, says Pankaj Pandey, Head Research, ICICIdirect.com. Excerpts from an interview with ETNOW.

How should one read into the YES Bank news? Three months ago, there was a big question mark on whether the bank would survive or not. But if they indeed raise capital, they will survive. The problem is that the stock today is in F&O band. What should one do?
We would expect some bit of short covering on YES Bank, but from a fundamental perspective we have not really rated the stock because the stock is under review. Earlier we had a reduce rating on the stock. Our sense is that beyond $1.2 billion, the bank would need more funds and that would lead to good amount of dilutions. Till the time you do not have clarity in terms of the extent of funds being raised, we would not be chasing this stock structurally. From a shorter-term perspective, a bit of short covering can drive the stock performance.

According to Citibank today the divergence between largecap stocks and midcap stocks now is at a historic high. Could it remain like this for a long time? After midcap stocks started correcting in 2009, they came back in fashion only in 2013. As of now, midcap stocks have only corrected for two-two and a half years. Are we in for a long winter for mid and small cap stocks?
Rather than looking at largecaps or midcaps as a basket, it is a very stock specific market. The index multiple is going up because the index has high multiple PE stocks. So, again it is a very stock specific market. We have seen cracks in largecaps also. We have seen very good performance from tier one companies and same is the case with even midcaps and smallcaps. My sense is wherever there is comfort on growth, the market has been giving robust multiples to a number of companies -- be it largecap, midcap or smallcap.

For example, ITC still does not show growth but the market is giving it a multiple of 19 times. Nestle has had at least 9% growth, and the market has been giving it multiples in excess of 50 times. So, rather than slicing it between largecaps and midcaps, it is better to slice basis growth.

Coming to pharma stocks, we have seen a decent buying interest in select names from Dr Reddy’s to Glenmark and even Aurobindo Pharma despite the overhang. Are there any select pharma stocks that you are looking at?
The market is not comfortable with stocks which have got higher exposure on the US market, especially in the case of Aurobindo Pharma. The share of the US market to their business is going to go up to about 58 odd per cent. That is why the stock is trading at 8 to 9 multiple. Other players like Dr Reddy’s are panning out better largely because they are looking to diversify their geographies.

Domestically, hospitals have done fairly well in the last quarter and their EBITDA margin is improving. Given that the capex is behind us, we also like the MNC pharma companies which have got higher domestic exposure. Growth certainty is definitely there along with some of the companies are witnessing good amount of margin expansion. Take for example Pfizer. It witnessed about 400 bps kind of margin expansion and which is why even some of these MNC names are trading 40 times, their current earnings even slightly more than that. Wherever we are getting any comfort in terms of stable growth, those are the stocks one has to chase.

What have you made of the recent run-up in some of the metal names? Would that be a pocket you would be willing to look at or you would still be averse to?
In metals, this rally has been largely driven by the idea that the US and China are going to strike a deal. We think some bit of technical bounce can be expected. But then, the structural issue of demand supply in balance globally is still sort of persisting and that is where we see challenges.

Within tier I names, we like Tech Mahindra more, given the fact that the deal wins have been pretty good in the last quarter.

-Pankaj Pandey


Domestically, we expect that the inventory correction has happened and you have seen raw material prices correcting. So EBITDA per tonne is likely to improve for some of the players but then one should not be overtly bullish on a number of these names. We still have a good amount of clouds and we would not expect much performance. This rally does not have too many legs.

Does one look at Zee in a new light altogether now?
The only positive in Zee is that you will not see pledged shares coming into the market. But there is the overhang of related party transactions. I guess the amount is about Rs 700 odd crore which is what the company had given to launch Dish TV. That remains a challenge because Dish TV itself is stressed. This is a key overhang and which is why we have turned neutral on the stock. Till the time that gets resolved, we would not expect a rerating to happen. Recently, what we have seen is that even the growth has come down because of the overall slowdown that we have witnessed in the economy. Till the time, related party transactions get resolved, we will not be turning positive on the stock.

Do you feel that perhaps now we might see a catch up and if so, which are the select names within the IT pack? Would you be looking at Wipro or Infosys to lead the way forward?
In IT, the growth has been on expected lines. There is not much of positive surprise to look at on IT side. But within tier I names, we like Tech Mahindra more, given the fact that the deal wins have been pretty good in the last quarter. That is something which we like at this point in time.

How should pharma be approached? After the US FDA booster for Biocon, is there merit in the stock?
We like the entire Biocon story. In H1, they made revenues of about $140 million on biologics and they have got about 28 products in the pipeline and are confident of achieving a billion dollar revenue by FY22. Given the capex the company has been doing and the initial success it has seen, we have a target price of Rs 310. Within the tier I pharma names, Biocon clearly stands out. Their subsidiary Syngene is also doing quite well. We are quite positive on this stock.

Largely we are more positive on the domestic oriented names whether it is Torrent Pharma which has got a higher share of domestic revenues or the MNC names or even the hospitals, wherein we are seeing structural improvement in margins, given the fact that capex is over. We are not chasing companies which are pretty aggressive on the US market.

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