Bullish on these 2 stocks in defence sector: Sanjiv Bhasin, India Infoline
This is a very negative development. A new notification talks about reducing margins (at PBT level) from 12.5% to 7.5% for projects given to all defence PSUs (DPSUs) on a nomination basis.
Reducing margins from 12.5% to 7.5% for projects given to defence PSUs suddenly is a draconian step,?Sanjiv Bhasin, Executive VP-Markets & Corporate Affairs,?India Infoline,?tells ET Now. Bhasin expects huge upside in Bharat Forge and L&T.
Edited excerpts:
If I rewind and take the clock back to 2015 or 2016, BEL was the go-to stock. The new guidelines, while they are not draconian, will clearly cap the upside for the defence business per se.
This is a very negative development. A new notification talks about reducing margins (at PBT level) from 12.5% to 7.5% for projects given to all defence PSUs (DPSUs) on a nomination basis. This is draconian. I would also take it a point further. When oil was falling to $40, you were cushioning the excise duty and when it is rising, it is adding to the current account deficit. You cannot have it both ways. You cannot eat your cake and have it too. This a very negative mood. Give the freedom to PSUs. On one hand, you are giving PSU banks a new lease of life and on the other, you are coming out with such measures.?
I still think defence is a very lucrative business. If I had to keep putting my money, it would be Bharat Forge and L&T where I expect a huge upside in the coming years. However, 500bps impact is way too large and in the short term, the BEL development has been very big dampener on the sentiment.?
The big-bang acquisition by Aurobindo Pharma will bring it closer to Sun Pharma. Aurobindo Pharma has a turnover of $2 billion and they have acquired a company worth a billion dollar plus turnover. Are they trying to bite much more they can chew or have they been smart and are buying a generic portfolio when prices are low?
Aurobindo has been one of the standout performers. It has a huge share in the injectable markets, results were better than expected and now it has come out of a hiatus and at this time, to buy some of the generics companies would be the best decision because things are going to only look better into 2019 and beyond.?
We think generic pricing is going to be back. FDA clearances are across the board and new portfolio launches are going to be extremely well received. Local market is doing extremely well for Aurobindo and this fits into their bill. The market may take it a bit negatively because of the over-leverage but for us it has been Sun, Aurobindo, Lupin, Dr Reddy???s and Biocon. This basket should be the outperformer as a proxy to a weak rupee and to better generic pricing in 2019. We are extremely bullish on pharma.
Has Tata Motors changed the orbit permanently? Do you think rather than being an underperformer, the stock has scope to be an outperformer and on a one-three-year basis, it could beat Maruti and Nifty??
Correct. You have hit the nail on the head. There are three things going for Tata Motors. The CV cycle has turned locally which is giving a lot of strength. The Slovakia unit goes on stream in Europe and some of the China excise duty issues are being sorted out. Plus, the big positive is that Tesla is now going to be facing EV competition from the likes of Toyota and JLR and JLR is going to be the second largest player in the US, except for the tariff rhetoric from President Trump. But, it is inevitable and that will be the game changer.
We have had a recommendation, the stock has underperformed but at these level, if I hear from the likes of Ashok Leyland which is saying that in the MCV market they are losing market share to Tata Motors, I will be extremely bullish and if you have a three-year view, then this stock is going to give you stellar returns. By end of this year, you could be looking for targets closer to Rs 325.
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