Here are today’s two midcap picks from IIFL's Abhimanyu Sofat

Mumbai | January 09 2019 13 : 08 IST | The Economic Times

One of the stocks that we are liking is Dishman because we feel going forward over the next two to three years, there is going to be an opportunity of around $100 million sales from six to seven molecules which are going to come up. 

One needs to look at it how the IL&FS thing plays out for IndusInd in terms of whether they take the entire hit for it this quarter, Abhimanyu Sofat, VP - Research, IIFL, tells ET Now. Dishman and Aarti Industries are the two midcaps Sofat is betting on today.

Edited excerpts:

This morning, IndusInd Bank comes out with earnings numbers. How are you viewing what the earnings season might do for the markets in terms of Q3 returns?

IndusInd will be a very good case of point to look at. We expect NII to grow by close to around 23% odd and pre provisioning profit to grow up by close to around 26%. However, what one needs to look at it is how does the IL&FS thing plays out in terms of whether they take the entire hit on the same. Also, what one needs to look at is that in case IndusInd Bank has a large business coming from the commercial vehicles side and since there has been a slowdown in financing of the same by the NBFCs, has there been a shift to financing by the banks? 

Those would be the interesting data points to look at in addition to what happens on the merger with Bharat Financial as well as any announcement on the succession planning. 

Coming to the overall earnings season, our main focus will be on banks like Axis and ICICI Bank where the growth rate in this particular quarter is expected to be significantly better going forward with substantial improvement in terms of slippages getting reduced. Those are the themes that we are right now focussing on from the earnings perspective. 

What is your sense on this mega merger between Bandhan Bank and Gruh Finance? What does it spell for Gruh Finance shareholders? 

If you look at Gruh from a valuation perspective, it was always an expensive stock but considering how other housing finance companies were working, though the growth trajectory was decent for the company and profitability was also nice, they were never on a big scale like Indiabulls Housing Finance and others. 

From that perspective, there is a lot of synergy in the merger. If you look at it, the target segment for both of them are similar and the product range as such is quite complimentary. If one does get these stocks in a correction, at maybe around 5% lower price, it is a good segment to be in microfinance. I do not see the challenges which the other NBFCs are facing. From that perspective, both low-cost housing as well as microfinance are good segments to be in. It is a good stock for investors who have a moderate risk profile to invest in. 

The Infosys buyback is going to be the second one, coming after the Rs13,000-14,000-crore-odd buyback that they announced last year. This one is expected to be a $1.6-billion buyback. Do you think the kind of momentum that we saw in 2018, can it be maintained in 2019 too?
It does not look like it will be a similar kind of a year for the IT industry. If we look at this particular quarter, we are looking for Infosys’s constant currency growth rate of around 1.3%. For the entire sector we see headwinds in terms of cross currency being there for this particular sector. This particular quarter is a weak quarter for Infosys and one cannot expect much in terms of absolute profit growth for the company. 

Going forward, we see that considering that the price to free cash flow for Infosys is close to around 16X and if you consider the cash, it is around 7X. This kind of a buyback is likely to sustain the current price of Infosys and one can see close to around 17% upside in Infosys going forward because clearly the price and the risk reward that we are having right now is quite favourable for investors. 

In case of US, we do not see a big recession happening because we feel that Trump is going to look at the stock market reaction very closely and not do something stupid on the China-US deal side. We do not see a significant downside in the sector though obviously in this particular quarter, we might see a slight dip in terms of profit from Infosys. 

Name some of your high conviction midcap ideas this morning. What are you sending out in terms of your top buys to your clients?

One of the stocks that we are liking is Dishman because we feel going forward over the next two to three years, there is going to be an opportunity of around $100 million sales from six to seven molecules which are going to come up. 

In terms of CRAM business, we expect a significant growth for the company and overall earnings growth of close to 27% CAGR over the next two years. In terms of valuation the stock is trading at half of Divi’s Lab so we clearly see an upside potential of around 23% in that particular stock. 

The other stock that we obviously like is Aarti Industries because the growth rate is likely to be more than 30% for this company, the second quarter was pretty robust and we see that next two quarters also earnings growth is going to be pretty good for the company. So, valuation wise, the stock is trading at around 20X and we see a significant upside in the stock considering that the growth trajectory is going to be pretty good and the risk reward is quite favourable for Aarti Industries going forward. 

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