Risk-reward still in favour of invt: Emkay

Ajay Parmar, Head-Ideas Research, Emkay, feels midcaps might outperform largecaps, in terms of performance, in the next 3-6 months.

He expects corporate earnings growth in sales to be 21% while PAT would be around 23-25% in next three years.

According to Parmar, the risk-reward ratio is still in favour of investors.

Excerpts from CNBC-TV18’s exclusive interview with Ajay Parmar:

Q: What have you made of the recent rally? Do you think it is now not gung ho and now the market is into an area of cautious stock picking?

A: The market has corrected in the last three months by 28%, and then regained around 13-14% from the bottom. At current levels, some sort of caution needs to be taken. At the same time, I do not see a lack of mistrust. If you look at the past three months, most large companies were also having corporate governance issues. I don’t see those kinds of issues. I see a lot of pessimism being built up in the past two-three months. If you compare it with the Q4 results, they are not that discouraging. At Emkay, we feel earnings growth in sales would be 21% while PAT would be around 23-25% in next three years.

Looking at the current market, it has gone up but the confidence or risk-reward ratio is still in favour of the investor.

Q: What would be your view on midcaps then, we have seen a bit of a party for the last few weeks? At this point, do valuations support a further upmove?

A: This gives you an indication that there is an all-round rally. Some midcaps are still available at 10-12 times and many of them are industrial leaders, they have shown innovation and leadership. So, there is case for a midcap rally. In the next 3-6 months, midcap might outperform largecaps in terms of performance.

Q: Would you say there is still further headroom in the realty space, as we have seen a fairly decent run up for that sector?

A: We are very positive on the real estate sector and believe that large companies should do well. We have a positive view on DLF and HDIL. These companies have the execution capability. A further ramping up is possible for DLF. We do not find any major fund crunch for the execution part of it.

Q: In the whole midcap universe, what would be your top picks?

A: We like Jubilant Organosys, Dishman Pharma, and Rajesh Exports, which is available at just 8 times FY10 earnings. We like companies like Orbit Corporation from real estate, ICICI, and Glenmark from the midcap space.

Q: What would the comment be on steel producers like SAIL and Tata Steel?

A: The steel industry has been a part of the global pricing phenomena, so whenever global prices go up, Indian producers are increasing their prices. The rise has been so high that the government, as part of its exercise to curb inflation, has taken a lot of fiscal measures. Suddenly, steel companies have tried to rollback some of their gains. Now, these gains are not very significant, but it shows that they are trying to co-operate with the government. I do not see a lot of direct control on the industry. Companies like Tata Steel, which gets 75% revenues from Corus, will definitely benefit because the Indian government does not control it.