Time ripe to cherry pick in midcaps and smallcaps: Paras Adenwala, Capital Portfolio Advisors
Earnings season shows corporates have done a far better job than was expected.
Some of these telecom stocks rebounded today, given the Vodafone-Idea conference call saying that the government wants a healthy telecom sector which is strategic for their growth and vision and that they want a three player market along with one PSU. I guess that explains the kind of rebound that one is seeing in these names.
Yes absolutely. Some kind of soothing statement from the government and we are seeing some kind of improvement taking place.When it comes to policy announcements and tariff cuts, let us see what are the actions on the ground following the soothing statements from the government.
Prima facie, if the tariff war has bottomed out and things start looking up -- not a huge price increase but a gradual price rise -- then I think there is a lot of value in the telecom stocks. But would I buy into them right now? There have been numerous times in the past where we thought there was silver lining and again some kind of adverse news came in, There is tremendous amount of volatility in the sector. Let it settle down before we start getting into it.
What else is driving you to look at markets positively today? On one hand, we have had the overall mood tempering a bit but today we are definitely seeing banks back in action. Which way are you leaning with regards to market direction?
There are numerous opportunities in the midcap and small cap space. Largecaps seem to be adequately valued for the time being. I would get into stock picking in the smaller space which has trailed the largecap space for a long time. If you look at corporate numbers, in several cases, it may be largecap or smallcap. They have been better than my expectations and that has thrown up numerous opportunities in the midcaps and small caps. We have been cherry picking for a while in the space and I would accelerate that momentum in cherry picking.
How to approach SBI now? SBI is looking for an IPO for its credit cards business. More importantly, the Essar Steel verdict in the Supreme Court has come out as a big relief to some of these lenders including SBI which is a large lender.
If there is one bank in the PSU bank space which I would be keen on buying , it is State Bank of India. Bulk of the writeoff season seems to be over now. Today’s Supreme Court verdict is pretty beneficial to various banks and more importantly SBI. The valuation gap between the private sector guys and SBI is also quite large, despite its clout and reach, despite the loan book and the huge amount of clean-up. The stock has been trailing and the catch-up needs to happen and it is a good time to be betting into State Bank of India.
The word on the street is that the Cabinet is going to finally decide on the scrappage policy in the next 12 to 15 days. Could that really push ahead CV sales and revive what has been a slump in the economy?
That would be a move in the right direction but that addresses only a part of the problem. What is happening right now is that the consumer is waiting for the BS-VI to come in and the manufacturers are trying to clear away their inventories on the BS-IV side.
Until the time the inventories are cleaned up, fresh production starts with great gusto on the BS-VI side. It is unlikely to propel demand immediately. There is a latent demand but it will take time. For the next couple of quarters, I am not expecting anything great happening on the automobile side. After two quarters, we probably should see some kind of normalcy returning.
Scrappage does help but as I mentioned it is only part of the solution.
The only sector where I am a little sceptical is on the construction and infrastructure side where you need a huge amount of capital and that is not going to come in very easily.
What have you made of the earnings season so far?
Rather than looking at the PAT, I would look at the PBT or the operating margins as far as the profitability is concerned. We would also look at the volumes as far as the top line is concerned. My sense is that the numbers have been far better than expectations. What we were reading before the onset of the second quarter season was far more fearful than what the reality indicated. Our corporates have done a far better job than what was being reported.
So I am not too disappointed. While there is some amount of slump as far as the business is concerned, but it is not as bad as what one had feared. As I mentioned for the automobile segment, that applies to the rest of the segments as well. In the next couple of quarters, we should see improvements happening.
The only sector where I am a little sceptical is on the construction and infrastructure side where you need a huge amount of capital and that is not going to come in very easily. We may not see too much of an improvement but as far as the rest of the segments are concerned, we should see some improvement happening.
What is your take on pharmaceuticals?
It would be hard to comment on pharmaceuticals as a sector because each of the companies have a different business model. But I am more positive on companies that are focussing on Indian markets rather than those that are export driven.
I have always liked multinational pharmaceutical companies. They have done a fantastic job. At a time when the markets were correcting, they kept on reporting very consistent numbers and the profitability kept on improving.
While they seem a tad expensive right now, on a correction, I would be a buyer. Among the Indian companies, I have a liking for Ipca Laboratories. They reported absolutely stunning numbers. A disclaimer, we have a holding out there. While the valuations have moved up, there is a scope for rerating. The other company which is looking interesting in the pharmaceutical space, is Alchem Laboratories, where again the numbers are good and the commentary has also been reasonably strong.
The visibility is good and the balance sheet continues to be good. These are two companies from the Indian pharmaceutical space besides MNC pharma that I would be looking at.