Park money in IT and corporate banks now as you wait for opportunities: Abhimanyu Sofat, IIFL
- Look at select opportunities in pharma sector too.
- Within the IT space, we prefer HCL Tech and Mphasis.
- Among NBFCs, go for Bajaj Finance, Cholamandalam, Sundaram Finance.
What is your view on Bitcoin, gold and 10-year papers?
The yield curve has been steepening in the Indian market also and the interest rates are coming down - which is a kind of conundrum. There is clearly some doubt in terms of the relationship between the asset classes. We try to correlate the GDP numbers with tax numbers which are coming. Right now, the problem in case of India is that we have gone through a large cycle every year but growth never seems to come about. The situation especially in the last couple of weeks seems to reflect the mindset that the government may not be aggressively looking at relieving the short-term pain, not only in the NBFC sector but even on the manufacturing and other sectors.
On the mining side, we have been importing a lot of natural resources which typically have one of the largest reserves. So a lot of systematic challenges are there. It is not that these have come just over last two-three weeks and were never there earlier, but there was a hope that the government will move fast starting with the NBFC crisis on the liquidity side. Since that is not happening, lot of deleverages are happening on the client side in terms of their overall exposure in the market. As a result, we are seeing a carnage in the smallcap and midcap space. Until and unless you have more money coming in, say from the Bimal Jalan Committee recommendations, which again has got postponed by a month, we do not see any big uptick in the market in next couple of weeks at least.
As you said, we have seen some of those midcaps take a real beating and even some on the back of news flow. What would you do in the meantime, particularly when it comes to the broader markets?
From the flows perspective, those 10-12 stocks now account for around 60% of the overall investment happening -- be it via mutual funds which is close to 58% or 60% in case of FIIs. Those 10 top stocks are where everyone is looking to park their money before they venture out and look at bottom fishing.
It is clearly the institutional view which is right now prevalent in the market and from that perspective, the consensus trades -- HDFC Bank, Axis Bank, ICICI Bank -- will continue to do well. Maybe the IT sector, where the valuations are quite reasonable could be another area where people will be more sanguine relative to the pharmaceutical sector.
A lot of things have happened over the last couple of years in the pharma sector. It is not only that the FDA has been improving compliance level for the Indian companies, but there has also been fall in pricing on the generic side.
So the IT sector as well as corporate banks are the spaces where one should be parking their money and look at specific opportunities. On the NBFC side, one can look at a stock like LIC Housing Finance because most of the other players are going through bad times in terms of getting money and you are also likely to see a significant reduction in growth for the affordable housing sector. Companies that have the ability to raise capital will continue to do well like Bajaj Finance, Cholamandalam, Sundaram Finance etc.
You were talking about stocks and companies that you are betting on to stay put for the long haul and Bajaj Finance is clearly amongst the chosen ones. What are the other names that you have picked out?
One sector which can be considered from a multi-year angle would be the insurance sector. Right now, it is difficult to say that one will be the one which will do better because clearly from a valuation perspective, HDFC is slightly more expensive than others.
Something like SBI Life should do pretty well going forward, in addition to HDFC Standard. These are the companies from the life insurance space that we like and if you want to play the Bajaj Finance story, buy Bajaj Finserv. At these levels, Bajaj Finserv also looks quite decent because of the growth trajectory which is likely to happen on the insurance side, will be complementary to Bajaj Finance where we expect the growth to be at least 35% CAGR going forward.
Where does an investor really look at this point of time?
Within the IT space, we prefer companies like HCL Tech and Mphasis because multiples for most of these companies, for example, HCL Tech would be around 12.5 times and with lot of opportunity coming for HCL Tech after buying some of the products from IBM, going forward there is a margin of safety along with a lot of other companies.
There is always a risk that there could be a significant fall in terms of earnings. In this kind of market environment, what investors are looking for is consistency in earnings and for the IT sector, that is likely to be better relative to other sectors. Investors should look at having stocks like HCL Tech or Mphasis in their portfolio in this kind of a volatile environment.
HCL Tech margins are the lowest ever despite IBM.
The reason for that is they have been investing a lot and obviously in between, they were not doing that well and for that reason only, they are available at these multiples. The call that we have is that there will be improvement in terms of how the company has been managing and the margins would improve. If you look at the overall multiple of the market, you have to look at whether you will lose money from the current level or not. From that perspective, HCL could do well going forward.
Are there opportunities within pharmaceuticals where one can start nibbling in right now because both news flow as well as prices seem to be at rock bottom?
One of the stocks that we really like in terms of doing pretty well over the next two-three years would be Torrent Pharma. Last quarter, numbers were not good and for that reason we saw that the stock had come down. However, we believe that with the Unichem acquisition, they have been able to really scale up the revenue per MR from Rs 3 lakh to around Rs 5.5 lakh. This clearly suggests that there is significant excellence in terms of execution from the company and from that perspective, Torrent is one stock from the pharmaceutical side that one should look at.
We believe that the typical US generic focus players will continue to face challenging times going forward and that is why like yesterday we had downgraded Dr Reddy’s because clearly on the market share side, we saw that Suboxone already has four generic players and one innovator in the market and Dr Reddy’s market share had come down. One has to be very stock specific within the pharmaceutical sector and other than Torrent, maybe Ipca Lab could be another stock that one can consider in the midcap pharmaceutical space.