Sanjeev Zarbade’s top 3 midcap picks
We are selectively positive on some of PSBs like SBI and cautious on NBFCs.
All the auto names bounced back today. What is driving that move today?
A couple of things could be happening in the auto sector. One is that the auto stocks have been one of the significant underperformers. In fact, the auto sector is down almost 40% on year on year basis in terms of stock performance.
Two, the government is quite concerned about arresting this slowdown in the auto sector and they are also trying to find ways in terms of how to provide some sops to revive the demand in the auto sector.
Three, the thing that we are seeing is that the monsoons started on a very weak note but could end in the surplus zone. There is a strong correlation between tractors and monsoons. We believe that certain product category could start looking better. Maybe the tractor demand could start getting revived and we have seen that, on the last few weekends, the government has come out with some measures at boosting consumption demand and something of that sort could be there.
The government has also talked about reduction in GST rates for the automotive products. If all these factors come into place and the fact that the valuations are appealing at this point, there could be some contrarian buying in the auto sector.
What are your top midcap ideas?
Our top midcap ideas include Engineers India Ltd. We are also positive on Century Plywood which reported a good set of numbers and also the management commentary was also very good. The stock has corrected sharply from its high and we see good upside in this sector. Century Plywood is one of the branded companies in the plywood sector. That is one stock that we are looking at.
In addition to that, in the cement sector we are positive on Orient Cement. The cement sector numbers were good in Q1 FY20. The realisations were also strong for the sector and the costs were benign.
So the sector has continued to report good numbers and Orient Cement is an attractively valued stock in the cement sector. These are the three names that we are very positive on among midcaps; Engineers India Ltd, Century Plywood and Orient Cement.
What is your strategy when it comes to the financials -- the private names, NBFCs?
In the financial sector, the private banks will be one of the major contributors to the profits in the current fiscal’s Nifty profit growth and what we are seeing is that the NPAs have largely peaked out. Provisional coverage ratios for the good private sector banks are in high range of 65% to 70% and also there is possibility of write back of some provisions because of the resolutions that could take place in the coming months.
We are largely positive on the private sector banks. So far as the NBFCs are concerned, we have seen that NBFCs had a very stellar run for three to four years back and since October the growth has been disrupted. Going ahead, we believe that NBFCs will struggle in terms of growing their return on equity primarily because currently some of them have a lot of cash on their balance sheet and are looking at deploying those cash into less return and less risk kind of assets. This will kind of depress their return on equity and they will also be looking more at housing finance loans, as against loan against property (LAP) which is considered to be high margin.
The NBFC sector is clearly facing some headwinds. Having said that, some of the stronger NBFCs names like Bajaj Finance could continue to do well and indeed Bajaj Finance is raising funds to meet the growth outlook that is coming ahead. Broadly, we are positive on the private sector banks. We are selectively positive on some of the public sector banks like SBI and we are largely cautious on the NBFCs.
Within PSUs, it now seems that the government may be taking up divestment as an agenda. Anything that you think is worthy of investment?
In the PSU sector, the equity sale by the government was a key overhang. Now the government has said that it will look beyond the ETF route so far as the share sale is concerned, that has come as a positive for the sector.
Within the PSU sector we are positive on Engineers India Ltd. In fact, there are a lot of PSUs which are quoting at very attractive price points, especially in the power sector. But the one stock that we track closely is Engineers India Ltd and this company is into consulting and project management for hydrocarbon sector. The order book is strong and the company is reporting good numbers even in the first quarter. That is one stock that we are looking at and have a price target of Rs 137 on the stock.