Now is the time to invest in SBI, Reliance: Abhimanyu Sofat, IIFL
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Now is the time to invest in SBI, Reliance: Abhimanyu Sofat, IIFL

The money market was one of the primary reasons for the fall in the market and especially that crack in the midcaps.
29 Oct, 2018, 12:20 IST | Mumbai, India
Now is the time to invest in SBI, Reliance: Abhimanyu Sofat, IIFL

Going forward, since we are in an election year, we are going to see an improvement in overall capex cycle, Abhimanyu Sofat, VP-Research, IIFL, tells ET Now.

Edited excerpts:

Can we expect today\'s buoyant sentiment and momentum to continue because the flows are not yet fairly supportive?

The money market was one of the primary reasons for the fall in the market and especially that crack in the midcaps. There we are seeing some signs of stability. In fact, on Friday, we saw a significant improvement in conditions in the money market and that is leading to the positive impact on the markets, in addition to the stupendous results by ICICI.

Going forward, as valuation for a lot of stocks seems to be beaten down, it might be a good time to start buying a bit, going forward. From our perspective, stocks like SBI at current valuation even after today???s good move should be the one that investors should consider buying because you are getting a stock at less than 1.1 price to book, with the kind of NPA closure like the Essar deal happening.

A large amount of recoveries are happening and we clearly see some kind of improvement in the profitability of such companies going forward. Private sector banks which have a high amount of CASA, banks like SBI as well as some of the bellwethers like Reliance, should be the kind of stocks that one should be consider investing in at current market levels.

It is interesting to see that you are betting on capital goods space because government capex is set to increase. But what about private capex? Which are the capital goods companies where IIFL is betting big?

In a rising interest rate scenario, you are likely to see a large amount of companies getting into bidding aggressively. When you look at only quality names, a company like L&T stand out. It gets benefits from Middle East business as oil prices go up. On the domestic business side, they have been focussing on more on EPC and not too much on businesses which require a large amount of capital.

In terms of valuation, the stock is currently trading at 20x. Seven-eight years back, it used to trade at least at 25-30% premium over the Sensex because the ROE of the company was close to around 35-40%. Going forward, we believe that since we are in an election year, we are going to see an improvement in overall capex cycle.

In terms of private capex, there are clearly challenges in terms of liquidity. But having said that, the utilisation rate across a lot of sectors being close to around 100%, we see many companies not being able to go up from the current levels. As a result, a lot of companies are going to get into the capex mode and for that reason, some of the companies like Larsen & Toubro should do well going forward.

Mphasis and Mindtree are your top buy picks in midcap IT. A depreciating currency does not necessarily augur well for margins. What makes you so bullish on Mindtree and Mphasis and not TCS and Infosys?

We continue to be quite bullish on Infosys, in addition to Mindtree and Mphasis. The core which one needs to look at in addition to currency is digitisation, where companies like Mindtree seems to have a significant advantage over other companies.

In fact, we have seen recently that growth in their top 10 customers seems to have improved a lot. They had challenge on one particular account which has now been resolved and going forward, the growth trajectory in most of these companies is going to be around 18-19%.

If you are getting companies at less than Nifty multiple over the next two years with a strong visibility of earnings, considering that the US BFSI segment is improving relative to what it was two years back in in addition to the tailwinds of currency, then there is still a case to buy midcap IT and not just focus on the currency parameter.

Organic growth even for the core business of a lot of companies in the sector also seems to be improving a lot. For that reason, it makes sense to continue to own these stocks, especially after the correction in last two months.

What are you factoring in for BPCL and how are you looking at the overall earnings trajectory?

In case of refineries, our view has completely changed in last one month post the government decision to take some amount of subsidy from these companies. Having said that these stocks whenever they are available at less than 1X price to book historically over last 20 years. we have seen these stocks give a return of at least 40% from those levels.

If one has bought at those levels these particular companies, going forward, considering the kind of capex these companies have done, while globally, there has hardly been any improvement in terms of refineries expansion, GRMs are likely to improve going forward. However, there might be a decline in this quarter as we have seen in case of Reliance.

I would probably look at buying BPCL at close to around Rs 255, rather than buying at the current level of around Rs 280 odd.

Pharma names also doing well. You have a buy call on Dr Reddy\'s. Why are you so bullish on Dr Reddy???s?

In case of Dr Reddy\'s, their quarterly numbers were pretty good in terms of margin expansion. Even if you look at the blockbuster drugs, Suboxone going forward is likely to add a significant amount of value to the company. The Russian market as well as the rest of the world did pretty well for them even as we saw margin improvement in the US market.

The amount of negativity that one was hearing about the generic market in US seems to be subsiding a bit. Dr Reddy\'s appears quite decent in risk-reward terms. Overall, 110-120 ANDA filings are due for the company. At least 10-15 of them coming from sites which are not under warning letters. Even under the warning letter, the number is close to 15-20. We see some of those issues reducing over the next six months to one year.

Overall, within the pharmaceutical space, Dr Reddy\'s seems to be a good stock to look at considering that the growth visibility looks superior to some of its peers.

At IIFL, what is your outlook on auto ancillary space?

Motherson Sumi is valued at close to around 15x FY20 which is close to around 35 to 40% discount to its average multiple for the last couple of years. Motherson Sumi looks a very good buy at current valuations.

In terms of the growth rate, there have been challenges with some of the customer base in Europe talking about a profit warning. I see that the business model of Motherson is quite diversified in terms of the clientele as well as in terms of geography. The acquisitions that they have done are likely to show better capacity utilisations going forward.

For that reason, it would not be a bad thing to buy a stock like Motherson Sumi at this particular juncture clearly because of the valuation at which it is trading at.