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Research

Govt action may lead to a midcap rally going forward: Abhimanyu Sofat, IIFL 

| August 20 2019 17 : 03 IST | The Economic Times

In IT, a midcap like Tech Mahindra and Sundaram Finance among NBFCs are attractive to us, says Abhimanyu Sofat, Head of Research, IIFL.

Some bank stocks like ICICI, Axis are going from strength to strength, Incremental buying is coming in some of these favourites in the market. Within the banking pack, are you looking at a select few or are you expanding that view?
What this particular earnings season has clearly shown is that some of the mid-tier banks like RBL, DCB had talked about challenges in terms of asset quality going forward and for that reason, the market is again focussing on the larger banks because with the bigger balance sheets, they will be able to take better care of the challenges. ICICI Bank, especially, should do pretty well. 

The commentary of most of the conference calls of some of the other company managements bear testimony to the fact that they have been talking about some risk on the unsecured lending. But ICICI has said they do not see any stress per se going forward. So, ICICI should do pretty well going forward in terms of valuation. The insurance business, where they have a stake will also do well going forward. 

Overall, in the banking side, my favourite would be ICICI Bank, HDFC Bank and Kotak Bank. We like Kotak Bank because they have been able to maintain CASA when most of the industry peers have not been able to do that. 

We are seeing some amount of buying in some of the auto names. Given the current state of the market, what do you think is driving this? 
The FADA (Federation of Auto Dealers’ Association) numbers have clearly been suggesting that on the four-wheeler side, the inventory level is as per limit at the dealer side because of the production cuts. In the case of two-wheelers, they continue to remain at elevated levels. 

In terms of valuations, Maruti trades at around 22x whereas Hero and Bajaj trade at close to around 16 and 18x. So, the slowdown will continue for some more time. These stocks are rallying clearly on an expectation that government will take some steps -- whether on the financing side or by reducing the overall life of a vehicle to probably around 15 years from 20 years and to may be 10 years for passenger vehicles. A lot of those kind of things are possible. I don’t think they will cut duties go.

So it is more a hope that is driving auto stocks. It would be more stocks which have been beaten down on the ancillary side and which are now available at less than 10 multiples which we find attractive, Something like Motherson Sumi looks attractive to us. 

Looking at the broader markets, we have seen some amount of buying coming in at lower levels which are very stock specific. Share with us some of your picks.
On the midcap side, some of the promoters have started buying their stocks which is an encouraging sign and going forward, there may be some amount of rally happening on the midcap side if we do see some action from the government. 

Coming back to stocks, Tech Mahindra is one stock we really like at this particular level. It is available at close to around 11 time multiple. The order book is one of the strongest ever, going forward in terms of the kind of contracts that they are getting into though the mid-term and shorter-term margins might be slightly less, because of the expected ramp up. 

We clearly see a strong growth momentum, especially in FY21. 5G is an additional opportunity which is there for them and the interesting thing about 5G is that the service opportunity in 4G was just 10% of the overall contract whereas it will be 20% in case of 5G and for that reason, once 5G comes in, Tech Mahindra should do pretty well. 

Other than that, from the NBFC side, we continue to like some of the smaller NBFCs which do not have too much of liquidity related issues. So something like Sundaram Finance still looks quite good to us. 

Out of these beaten down names, DHFL, Yes Bank or even the Essel Group stocks should find takers at these prices, because things seem to be improving somewhat. Would you say stay away as there are lots in the market which are more attractive?
I would not be able to comment on Essel Group because of compliance reasons. In case of Yes Bank, a reasonable growth of around 20% for the company is possible because they were growing at a very high rate of growth. One would need a dilution over the next two years of close to around Rs 15,000 crore. Clearly the amount of money which has come in is not good enough for ensuring growth for the bank going forward. 

With regards to DHFL, on the debenture holder side, there are a large number of HNI investors who have invested in that. They still are not a party to whatever agreement has been talked about in the press. It is going to be probably a long time before everything settles in that particular case as well.

There is a view in the market that CCD could be looking at selling their stakes. They are talking to Coke and ITC to sell the coffee business; and L&T to sell Sical Logistics. That is what we hear and understand. Is there merit in buying RBL Bank? They have a large exposure to CCD.
There were two reasons why the stock at that particular point of time had come down; one was the CCD issue and one week before that, there had been this issue of Andhra Pradesh, that Jagan Reddy might do away with some of the projects which have been given. RBL had a significant amount of funding for those particular projects. 

So yes, if those two particular things are taken care of -- the CCD issue as well as the Andhra issue -- from a valuation perspective, RBL will continue to do well. 

On their core businesses, they are doing pretty well. The growth on their credit card business was more than 50%. In the last quarter’s earnings, the top line growth was not a concern at all for RBL. It is more to do with some of these fundings which they have done on the corporate side and that is a major concern. So yes, RBL can be looked at from that perspective. 

Do you like Sundaram Finance because it is a low growth safe model or do you think this time they will do something different in the economic downturn?
It is a conservative company. They have never ever diluted till now. That is unheard of in the NBFC space. We do feel that since a lot of the other NBFCs are losing ground because of lack of availability of capital, going forward, there is clearly an opportunity in the market. Demand is there. So good quality customers are likely to come to companies like Sundaram. We have also seen that they have recently sold their holdings which will shore up their overall equity base, which can further be leveraged by the company. 

We feel that though the growth will not be very high at around 30%, we still believe it will be a decent 15% to 20% growth story over the next two years.

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