IIFL’s Abhimanyu Sofat on where to find value after recent correction

Mumbai | September 28 2018 13 : 24 IST | Economic Times - Mumbai

Abhimanyu Sofat, VP-Research, IIFL continues to pick across the spectrum from Axis and ICICI in largecaps to MM Forgings and Tata Sponge among smallcaps. 

Abhimanyu Sofat, VP-Research, IIFL continues to pick across the spectrum from Axis and ICICI in largecaps to MM Forgings and Tata Sponge among smallcaps. 

Edited excerpts: 

How would this Apollo Tyres story unfold? The fact that the shareholders do not want Neeraj Kanwar to continue on the board may lead to some correction in the stock. Is Apollo Tyre a buy on dip? 

I do not think institutional investors lack confidence in Mr Kanwar’s ability to manage the company. The issue is related to the compensation being paid to the promoter and we have seen that in the last seven, eight years, the compensation Apollo Tyres have been giving to management is significantly higher than what their peers in MRF or other tyre company give. We have seen these cases coming up more and more where institutional investors have been aggressive in terms of the rights they have. 

In a way, a very positive thing is happening from the public market shareholder perspective. People are now questioning the compensation being paid to management. Over a period of time, things are going to settle down. If there is a big correction in the stock, one could consider buying Apollo Tyres because clearly the business dynamics do not change. The capacity utilisation in their Hungary plant is likely to go up significantly. The margins there are better relative to their other European business. 

Even on the domestic side, there could be some improvement in business though margins might get impacted because of the higher raw material cost. From the next two years’ perspective, this is a good price point to look at this particular stock. 

Do you think the 6.5% fall in Piramal Enterprises will be seen as an opportunity?

The management pedigree of the company is pretty good. Having said that, a derating is taking place across sectors considering how interest rates are going up. The company is largely exposed to the real estate sector as well as the financial sector. Considering how interest rates are going up, there will be pressure on companies like Piramal in terms of profitable growth from the next couple of quarters’ perspective. 

I would say that at a price of around Rs 2000- 2100, I would look at adding more in case of Piramal and not look at the stock at current price point. 

Where do you find value after the recent correction?

There are always opportunities in the market. In the smallcap space, something like a Tata Sponge looks quite interesting to us. Market cap is close to Rs 1,300 crore, cash on books is of close to around Rs 600 crore, EV/EBITDA close to 3X with the ROIC close to around 35%. There is enough margin of safety at current valuation in such stocks. 

From the auto sector, something like MM Forging looks quite interesting to us considering that 60% of their business comes from exports and with tailwinds of Series-8 trucks growth in US being strong along with the currency depreciation and domestic HCV industry also doing pretty well, that stock looks quite decent to buy and accumulate at lower levels. These are the stories that we are looking at. 

Among the largecaps, we are more bullish on private sector banks like ICICI and Axis as well as stocks like Reliance where we feel that at any downtick in the stock because of market correction should be looked at for adding position in the stock. 

Clearly, the petrochemical business should do well going forward as well and being the largest internet play available in India, it is a very good story to hold on to for at least next two to three years. 

Source: Economic Times


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