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Yogesh Mehta’s two top midcap picks

ET Now|
Updated: Jul 31, 2019, 05.18 PM IST
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  • We may see some dead-cat bounce in auto.
  • ICICI Bank would be a better bet than Axis Bank.
  • Do not foresee the clouds of worries over for DHFL.
Betting on midcap IT stock Tech Mahindra and among financials RBL Bank, says Yogesh Mehta, Founder, Yield Maximiser. Excerpts from an interview with ETNOW.

What is your outlook when it comes to the IT report cards? When it comes to midcap IT companies, some of them are struggling with deal wins not really coming in. Are you concerned?
Midcap IT companies are struggling from this quarter onwards. Only Mphasis has shown a strong traction that could be a standout performance this financial. Tech Mahindra, could see an advantage because though EBIT margin was a little down this time due to wage hikes and visa issues, deal wins were very much in line with expectation. Throughout FY20, that will remain and they have given a guidance of roughly 12-15% growth rate.

Overall on the earnings side, it will draw FY19 to FY21 7-8% CAGR growth rate and PE multiple wise also even in this downtick today, they are still available at almost less 12 times forward earnings.

What are your top midcap picks?
As I mentioned, I would go for Tech Mahindra. It will not exactly be a midcap, but apart from that it would be RBL Bank. Post the result, they have admitted that they have poor corporate asset quality.

So Rs 1,000-crore odd value would be there which may come out as NPA or turn out to be NPA over the next three-four quarters, but the price has corrected to Rs 400-410 level.

I would say that even if the book value goes down by 10-20% from here, even at Rs 200-210 price to book value, it is available at a little less than 2 times price to book multiple and the growth opportunity with other factors and the opportunity with 30% growth rate over next one, one-and-a-half year still. There is a good opportunity to earn money here.

Even though Axis has done pretty well in the quarter so far, because of the kind of provisioning as well as the slippages that they reported, it is not looking all that comfortable for the future quarters?
Yes, definitely the numbers which have been delivered are more in line with NIM expectations and the provision coverage ratio.

The main worry is the eight newly identified corporate slippages. That is driving some worry across the investors. And coming back to the NPA and GNPA levels, these are quite stable, but the writeoff they have done and the upgradation of recovery all are okay. Still those assets worth Rs 12,200 crore that they have identified, may have dampened the sentiment further.

The last few quarters saw a phenomenal performance by Axis Bank, but Q1 earnings outlook shows some deterioration into the underlying lending environment. So, one needs to be cautious and on price to book basis.

At Rs 300, it is still expensive at 2.3 times price to book. Rather than that, we have seen retail facing ICICI Bank has come out with a tremendous set of numbers and is showing good growth and likely to improve further. In the same environment, ICICI would be a better bet.

We understand a resolution plan is in place for Dewan Housing. The COC is going to hopefully approve it in a week’s time. The Zee deal should hopefully close in by today itself and it seems like Jet as well is ambling towards the resolution finally. Along with the Fed and the MPC meet, are we going to get some near term respite to the market?
I do not foresee any kind of resolution in Jet Airways or maybe DHFL or any other company but those are deep in mess right now. They are just sailing into a very low surface. In case of DHFL, in September 2019, Rs 14,000 crore of NCDs will be up for redemption. So, that is coming.

I do not foresee that the clouds of worries are over for them. They will still be there. As far as Jet Airways is concerned, any consortium or any buyers that comes across, will have to take on the debt. At this point in time, I do not think it would be a viable era for any investor to come in and bail out or try to infuse capital into these companies.

What is your quick reaction to positive news for fertiliser names? Anything in particular that you like from an investment perspective?
Yes, the announcement which has come is slightly positive for the industry, I would say Coromandel Fertilizers and to a certain extent Deepak Fertilizer or those are the speciality chemical in the urea manufacturing could find it advantageous to them to a certain extent.

What would you be doing with auto names right now?
For auto, the slowdown has been there since three odd months. We may see some dead-cat bounce in auto from here. But overall the sales number will take at least one or two quarters more to improve and we will have to wait till the festive season. But otherwise, because EV disruption is there, the insurance factor which is impacting new sales and the slowdown impact on discretionary spending, along with liquidity situation will have some more impact. Though valuations are not attractive, Maruti with 52% of market share in passenger vehicles, at Rs 220 EPS, is still expensive. It is available at 20 times PE multiple and the growth level could not be more than 12% to 14% at the best.

In the two-wheeler segment, again slowdown is impacting and it needs to be seen if the new launches would be able to sustain the competition within the Hero MotoCorp or Bajaj or the TVS. Plus the EV disruption would be there from 2021. Auto will have some more pain to go through and probably it would not be right now to look at it. The auto index is down by 27% in this calendar year. In the last calendar year, they were down by almost 20%.

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