Why Abhimanyu Sofat is betting on largecap rather than midcap IT

ICICI Bank results will be out today. Other than that, we have been tracking a whole host of names in the broader market that has seen some buying interest like Torrent Pharma, SPARC, IGL. What is going to be on your radar?
Broadly ICICI Bank numbers, on the asset quality side, are well in line with expectations. Going forward, ICICI should continue to do pretty well in terms of what could be the upside in the stock. We believe it could go to a level of around Rs 490 odd current level, giving a 1.8 time price to book to the core earnings as well as adding up subsidy valuations at a 20% discount.?

However, one concern that one sees in their result is that a lot of delinquencies seems to be happening in the Kisan Credit Card. The retail bad loans number has gone from 1.1% to 2%. Looking at the numbers that have come from Maruti or Bajaj or even Havells, it seems to me that the rural seems to be slowing down quite drastically over the last couple of months. That is a big worry of concern with regard to slowdown going forward.?

As far as the broader market is concerned, clearly stocks like Torrent Pharma which you talked about are quite decent, despite some one-off challenges that the company has faced recently. We continue to remain quite positive on that and still believe that from here, you can get a 20% upside in case of Torrent Pharma because if you look at how they have done the Unichem acquisition or grown their domestic business, clearly there is a significant growth opportunity, especially in FY21 for the company.

What is your view on midcap IT companies? Could rising cost as well the slowdown in BFSI be a point of concern for some of the midcap IT companies?
Yes, absolutely. Be it Cyient or Persistent, clearly there have been challenges in terms of how growth is going to come going forward. The annual contract value for the overall industry for this year is expected to come down to around 5% growth. We would be more bullish on slightly larger cap companies like HCL Tech, Infosys, Mphasis as well. The scale and size would be a kind of a differentiator in this particular kind of an environment. Most of the companies are transforming on a digital side but on the core earnings side, in core portfolios, we clearly see some headwinds for the sector and for that reason it make sense to be with some of these companies where growth continues to be quite decent.

The Finance Minister has said in an interview with ET that she did not see it as a liquidity crisis as such, but more a problem of lack of lending to legit or correct customers, alluding to the fact that there is a hesitancy to lend. What do you make of some of these comments that came in over the weekend?

For sure, if the finance minister does meet these FPIs and gives a way out for them because changing from a trust to corporate structure is not that easy for all of them. One should remember that some of these guys have multi-country operations and for them to do certain changes just to invest in a particular market, is quite tough to do.?

If there are some changes, I am sure it will be welcomed by the market and what they have said over the weekend should be taken positively. With regard to funding, clearly there is some improvement in the system with regard to NBFCs as well.?
The challenge is that overall, in which market should one invest? Today banks have an issue with regard to CASA. Most of them are dependent on term deposits. The kind of NIM expansion which should have happened for banks is clearly not happening and the overall system where the velocity of money seems to have drastically come down because there is hardly any movement of money from one instrument to another.?

Overall if the finance minister does do that change and we do see significant cutting of interest rates going forward because our real interest rates are significantly higher than what the world is at. We are at more than 40% negative interest rate globally. If there is that change in terms of monetary policy as well as financial policy with regard to lower taxation, market recovery is bound to happen because there is money sitting on the sidelines waiting to be invested. It just needs some kind of sentimental booster from the market.?

Asian Paints saw some great movement last week on the back of continued delivery on earnings. What is your view on Asian Paints currently?
Asian Paints was one of the few companies which clearly is telling the markets that despite the kind of slowdown that most of the other guys are talking, they have not witnessed any major slowdown in terms of volume growth. Going forward, we believe Asian Paints will continue to get these premium valuations. If you want to look at some other stock which is slightly less expensive than Asian Paints, Berger Paint could be an interesting buy.?
The earnings there is expected to grow at around 18% CAGR, at a multiple of around 44 or so, which from a traditional mindset is obviously high but considering that it is better to look at margin of safety in the market at this particular juncture, Berger Paint should also do well and overall the commodity price is also a quite benign for the sector. We are quite hopeful for the paint sector, especially companies like Berger Paints and Asian Paints.?
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