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Small and midcaps have a lot of tailwinds going for them: Abhimanyu Sofat, IIFL

Mumbai | December 24 2018 12 : 53 IST | The Economic Times

In the tyre space, what we are extremely bullish on is Apollo Tyres at around 12x multiple, where we are seeing tailwinds of crude price reduction and incremental growth coming from increased utilisation from the Hungary plant. This would be our preferred pick within the auto space. 

Given a choice, Abhimanyu Sofat, VP-Research, IIFL, would play the auto sector through the auto ancillary route. He spoke to ETNow. 

Edited excerpts:

Quite a sharp weakness came on Friday. Considering that this week is in holiday mood and truncated in any case, we have got expiry as well to deal with. There will be very less FII participation in very bleak volumes. Do you think GST rate cuts announced by the finance minister over the weekend could perhaps keep the market a little cheery? 

So, a large part of the cuts which were expected have not happened in the meeting. Probably, we need to wait for January because clearly for of the states, the impact could be quite significant in terms of lower revenue and what we understand is that a lot of non-NDA governments were actually against the cuts. 

The main trigger could be something that happens in sectors like real estate because they are one of the key important sectors. If you look from a gross capital formation perspective, growth there has been the least and they are a large contributor to the gross capital formation overall for the country. 

So, if you talk about the markets, we clearly are of the view that small and midcap is the space because crude price has reduced, revenue growth continues to be quite decent for sectors and capex cycle is another thing we are really quite optimistic about, going forward. Private sector is still growing at around 14 per cent and the government is growing at around 11 per cent. Even in the metal sector, we are seeing capex of close to around 15 million tonnes of capacity over next 2-3 years. 

So from that perspective, things are looking quite optimistic from the small and midcap side. As long as international markets continue to be fine, they do not go down too drastically, it makes case to look at some small and midcap stocks. 

A lot of auto stocks are being downgraded primarily because many on Street believe that this is best as it can get when it comes to their reported earnings profile. Do you think the cycle has peaked for autos? 

Within auto, there are different stories happening in terms of different segments. Clearly, in the commercial vehicle space, we have seen a little bit of slowdown in the last couple of months. Overall in the sector, we have seen inventory pile up, things are not as bad as what reported numbers say. If we want to build a position in the sector, auto ancillaries are the right way to get into it. 

In the tyre space, what we are extremely bullish on is Apollo Tyres at around 12x multiple, where we are seeing tailwinds of crude price reduction and incremental growth coming from increased utilisation from the Hungary plant. This would be our preferred pick within the auto space. 

In addition to short term issues like Kerala floods, the order book has reduced drastically for Eicher, which has led to a lower multiple for the company despite higher RoE of close to around 28 per cent. Right now, we would be more bullish on companies like Hero MotoCorp to look at within the space and if you look at the commercial vehicle segment, one would look at getting into an Ashok Leyland at a price point of close to around 100 or so. 

At various price points, some of the stocks would become attractive. But largely, we would like to play the sector through auto ancillary route. 

Can you do some comparative analysis between Axis Bank and ICICI Bank and why you prefer Axis Bank to ICICI Bank? 

The reason why we are more bullish on Axis relative to ICICI is one that there is a difference in RoE. The RoE of Axis Bank relative to ICICI Bank is at least 400 bps higher. 

Second, it is more plain play on the revival of corporates as well as whatever we are seeing in terms of asset quality issues. In the case of ICICI, it is more of SOTP (sum of the parts analysis) kind. We expect a lot of good changes happening in the structure of management after the new CEO taking charge. 

Already, we have seen some changes especially on the corporate banking side at the top happening for the bank. 

So those are some of the reasons why we feel that from a risk reward perspective, we would prefer Axis Bank to ICICI though I might add that we have a bullish view on ICICI as well. 

What is your view on midcap IT names? 

There are a lot of opportunities which have come up in the midcap space. So within IT, something like MindTree looks quite exciting to us though there is an overhang in terms of stake sale by one large investor group. Valuations are quite attractive; earnings momentum continues to be quite strong. The stock is trading at around 14.5 times earnings which within the sector is quite good. MindTree would be our preferred pick within the IT midcap space if one needs to make a decent amount of money over next 3-4 quarters. 

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