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Hope trade driving midcaps, but wait on smallcaps: Nischal Maheshwari

We can look at some quality midcaps as economy is likely to turnaround, says Nischal Maheshwari

ET Now|
Last Updated: Jan 16, 2020, 04.22 PM IST
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ET Bureau
Nischal Maheshwari
Nischal Maheshwari, Centrum Broking, says hope trade is what’s behind the ongoing rally in midcap stocks, as investors are building up positions in anticipation of an economic turnaround. Edited excerpts from an interview with ET NOW:

What stage of the turnaround are consumer stocks currently in? What is your sense and how would you strategise with that basket?
I think the slowdown has been largely driven by rural India because urban slowdown has been there for some time and it is sort of neutral at this stage. But it is the rural slowdown that has hit the FMCG sector. We have had a good summer crop and the winter seems to be good out there, so I am hopeful of a revival. There is water in the ground and there has been record sowing. So, I believe, the winter crop will be good. If you have two back to back good crops, there will be money in the hands of the farmers and the FMCG demand should revive. The outlook for maybe this and the next quarter may not be very strong but the new year should be good for them as far as volumes are concerned.

In a matter of months, views on commodities have changed. Till last month, experts said don’t buy commodities, there is a problem in the world, there is a trade war. But look at what has happened in last one month – steel prices, steel stocks have gone up. Why is that?
This is because there is some certainty and with the US-China trade deal signed more semblance will come across the world. Secondly, whenever the dollar is depreciating, commodities do well. Largely, it has to do with what is happening in China and US and stabilising of their relationships as this would lead to demand coming back across the economies.

What would you make of the comeback in smallcap and midcap stocks this year? Is this more like a mean reversion? Or have midcap stocks bottomed out and it makes sense to migrate away from those 10-15 stocks to midcap & smallcap stocks?
Maybe not at smallcaps as yet, but we can look at some quality midcaps as the economy is likely to turnaround. This is sort of a hope trade. Given the government has started taking measures and they are cognisant of the fact that we are in a slowdown, so they are taking steps to revive growth and in anticipation of that investors are building up positions in the midcaps. I would not want to go down to the smallcaps as yet because the easy liquidity conditions and the fall in interest rate seem to be in the past and that was a good factor for the smallcaps but that seems to be no more. So, I would be cautious on the smallcaps for now.

Morgan Stanley has reduced weightage on Bajaj Auto and now has a slightly contrarian view on it. What is your take on this stock?
Bajaj has been our top pick, not only in midcaps but across the whole auto segment. One of the things which we are highlighting about Bajaj Auto is its ability to keep coming out with innovative products and again and again, we see some being successful, some of them not. They are the first guys to put out these products, whether it is electric vehicles now or power motorcycles earlier.

Bajaj has been at the cusp of innovation all along and that differentiates it from others. Secondly, 50% of its sales come from exports so that gives it a very balanced approach.

How would you approach telcos, especially Bharti, in the backdrop of the sizable fundraising that they have managed and the looming AGR dues?
AGR is a problem present across the sector - be it Bharti Airtel or Vodafone; everybody has to pay them. That is sort of a neutral thing as far as the competition is concerned. But if you look at it, now there are only two players who have the ability and the pockets to go out and spend – whether it is the rollout of 5G or expansion of 4G across the country. So, that is where Bharti really stands out. And within the space, if I look at Reliance, it is still a conglomerate. So, if somebody wants a pure-play then Bharti is the only stock out there. I think Bharti stands out and that is why it has got such a good response on its QIP.

What are the markets expecting from today’s review petition? Do you think it is a foregone conclusion that AGR relief for telecom companies is not coming?

I do not think anybody is expecting something to be changed because this has been a Supreme Court guideline only. Yes, it is a larger bench but nobody expects that there will be a dramatic turnaround and the Supreme Court is going to actually reverse its order. I do not see much relief basically for the sector.

If the assumption is that AGR dues will have to be paid by Vodafone and Bharti, then why is the institutional appetite to lap up Bharti stock so high?
So the market looks at a longer-term picture and what they are seeing is that there might be a two-player market now. Secondly, a 30% to 40% increase in tariffs has got absorbed pretty easily which was a surprise for me also. But, it is still early to say, once this kind of an increase has happened and if it becomes a two-player market, there is a very likely chance that tariffs may still keep on going up along the way. What the market is seeing is that if there is a two-player market, a duopoly, there is a high chance that these guys might be able to sustain a higher ARPU which will be profitable for the industry.

Banks have exposure to Vodafone. Banks like HDFC Bank have exposure to telecom. Are markets not realising that?
SBI has the largest exposure to Vodafone. It is somewhere around Rs 28,000 crores, then we have Axis which is another large chunk. We have Yes Bank. Obviously, everybody has some exposure but the large exposures are with SBI and Axis Bank. SBI because of its large balance sheet should be able to see through it but Axis will have a problem and so will Yes Bank. And that is why these three-four banks are not going anywhere. This is the only reason but the market is cognisant of the fact and it is accordingly valuing them.

Clearly, as we count down to Budget, hopes are quite high that we will see some key reforms and from a market standpoint of course LTCG is the big one. What are you anticipating? Do you see merit in markets building up as we countdown to budget?
There is good hope given that in the last two months the government has done a lot of stuff for the economy and the market. The market’s anticipation is there but we have to be cognisant of the fact that as far as the government balance sheet is concerned they do not have much space. I don’t expect any tax cut as such. However, LTCG could be done without impacting much of the balance sheet for the government and can be a good sentiment booster. With GST, there is nothing much which the government can do through the Budget but obviously some hopes are there for the markets.

What is happening with gas stocks? Yesterday, they were all on a tier – be it a Mahanagar Gas, IGL. Why this renewed optimism?
Yesterday, the gas consumption numbers came for the month of December and they were pretty good, both at the level of the industry as well as at the level of the consumers. There was almost a 10% to 11% jump in gas consumption at the CGT level. That is why you saw Mahanagar Gas, Indraprastha Gas, Gujarat Gas rally.

There has been traction in the entire real estate space. DLF has really held high. You also have traction coming in some of the other realty players like Sobha, etc. This is where the real dichotomy is. Things on ground with the sector are one thing and what the stock prices have done in the year gone by is another. But there is heightened anticipation that the government is going to dole out some concessions, some fillip for the real estate sector to revive. Do you think there is a case for adding more positions or buying some of these realty names a fresh?
I think one should be looking at realty names and the reason we have been recommending realty for some time is two-fold. Just like telecom there is a huge amount of consolidation which is happening within the realty. So builders which had one or two buildings or who were doing largely, now because of RERA and because of tight money conditions are out of the game. Companies with strong brand names, and those who have a strong balance sheet are the guys that you see doing well in the stock market. And if you look at the ground situation, they are the only guys who are doing a lot of sales and are able to deliver the products.

People are seeing through the whole this thing, there would be survivors out of this. The real estate is not going to just die away. There will be fewer players and in that anticipation, the market has started going towards companies who have got clean and strong balance sheets and strong brand name. Be it DLF in the north or Godrej here or few players in the south, so I think that is where you are seeing the polarisation happening in the real estate. I believe this will continue because there is going to be a long drawn-out consolidation across the country.

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