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Some largecaps have become midcaps on way to becoming smallcaps: Deepak Shenoy

ET Now|
Updated: Jul 15, 2019, 07.30 PM IST
Deepak Shenoy-1200


  • We are looking at revival in capital goods.
  • Liquidity not to flow into midcaps for another 6 months.
  • In IT, largecaps to benefit first and then midcaps.
RBI may actually create a lower interest environment for corporates in the next six months, says Deepak Shenoy, Founder, Capital Mind. Excerpts from interview with ETNOW.

Which will be your top midcap sectoral bets or midcap stocks bets if you have any? When will you start to buy them more?
Something interesting happening in the market right now. The government bond yields are falling quite significantly. It does not translate to interest rate cuts on the ground but revival of the NBFC sector . RBI may actually create a lower interest environment for corporates in the next six months.

At this point, we are looking at a revival in capital expenditure, capital goods. A lot of stocks in that sector has been beaten down. Some of them in the largecap area are also looking attractive in terms of valuations and I believe that may be a sector to watch for a turnaround if interest rates come down and the capex cycle revives.

I believe capital goods players will make the first jump following which infrastructure is worth looking at right now. It is the initial stages. I am not looking to just jump in and go the whole hog but waiting for and the recovery. We may get to see a recovery in NBFCs’ borrowing abilities. I am looking at the debt markets constantly for cues there. I would say that is another point to start looking at buying something which has been beaten down players. I am still not confident enough to say go buy everything but looking for cues where the interest rates start to revive the economy.

Do you think value is now starting to come back in the midcap space? Day in and day out, stocks are cracking in on any news flow and not all of them would have such problems going ahead. What are the markets pricing in now?
By midcap you mean IT stocks or you mean overall?

Overall the stocks in the midcap space have been battered. We will see a lot of midcap stocks come down substantially -- some of them for good reason. Some of them were largecaps which have become midcaps are on the way to becoming smallcaps. But I feel the economic recovery as it happens will impact a lot of the midcap players positively also. The ones that survive - -whether it is NBFCs, auto or any of the other battered sectors -- will continue to gain any retail market share now. Those will perform in the longer term.

You have to look at leaders in each of their sub sectors and when the overall sector recovers, I believe all of them, including the midcap players, will recover quite substantially. Having said that, you are going to see a lot more liquidity challenges. Liquidity will not flow to midcaps for at least another six months and so every person trying to exit a midcap will cause a severe price correction.

We are seeing that right now, even today, a bunch of midcaps have been beaten up but this provides a good opportunity for picking up stocks that we believe at least will survive whether it is in any of these spaces or I would say valuations are much more attractive here now than they were may be a year ago.

The one star clearly has to be Infosys and the move that we have seen post earnings. What is your reaction to those buoyant numbers. Infosys or the tech giants are sounding so confident. But would you also keep an eye on their cost controls?
To be honest we are not allowed to comment on Infosys this is a disclosure to be there so I cannot comment on the numbers per se but it looks like the markets are taking it well. So I cannot unfortunately comment because of a conflict here.

What have you made out of the kind of numbers that we have seen from the IT pack so far?
Overall IT has been looking interesting. We are looking at a lot of deal wins overall across the segments. We are looking at financials starting to see some kind of returns from earlier which was BFSI was one of the weaker things in the last three years that started to come back. There is more deal wins in terms of deal sizes. We are looking at significantly higher deal sizes now compared to earlier. Largecap IT is benefiting from it.

Cost may go up, we are seeing that in the TCS numbers but the rest of the pack when they come in we will see the cost remaining high. Margin pressures will be there in the immediate numbers at least because the rupee has appreciated in the quarter but overall, there is a lot of deal wins and lot of order flow as very positive for the IT sector in general. The larger names will benefit first and it flow down to midcap names as well.

You mentioned about the auto pack. Do you think auto will be interesting going ahead? Auto you can probably extended to auto ancillary as well if you want to look at the midcap space. But do you think both these spaces will look interesting?
Right now, we are going through a down cycle. There is a bit of cyclicality also involved here but multiple issues -- both regulatory and financial -- have hit the sector continuously and we have seen whether it is NBFC financing, whether it is an increase in prices due to regulatory changes in norms or perhaps the BS-VI coming up -- all is putting a lot of focus in the sector.

But I believe, longer term India is terribly under served in terms of personal mobility and commercial vehicles are also going to increase because we have so many roads coming up. Finally, crude prices and are reasonable, and do not have inflationary effect. Longer term, there are going to be a lot more vehicles on the roads.

In the near term, there is perhaps even more damage to come. Sentiment is extremely weak and until numbers change, I do not think people are going to start buying these stocks in a big way.

But as you said that when the sentiment change, people will start to buy these stocks and if anybody is buying now, he has to be clear that he has to wait for that sentiments to change. So it may take one month, six months, twelve months or even more time than that?
Timing will be dependent on a number of other factors as well. We have had interest rates falling yet they have not impacted sales as yet. We have had less than a year since the new load norms of CVs were announced and the pickup has not yet started.

Let us look at July numbers. The June numbers were weak enough. I believe at least July onwards we should start seeing a sentiment or a sales number change at least. Looking at the numbers this has been a very bad year but we had seen much worse in the past. So, it may turn worst before it gets better. But I am not going to make any predictions on whether it is one month or six months. Let us see. The data will tell us and markets will still remain weak because people typically do not react in the first time to good numbers after a long period of bad numbers.

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