Moneycontrol
Jan 25, 2013 02:12 PM IST | Source: CNBC-TV18

Largecaps to lead mkt recovery; bet on midcap IT: Alchemy

Over the last few days the market has suffered due to a poor breadth and midcaps in particular have taken a beating. Hiren Ved of Alchemy Capital Management expects the large caps to be better placed than the midcaps in the recovery cycle. He is also hopeful of healthier earnings in 2013 as compared to 2012.


Over the last few days the market has suffered due to a poor breadth and midcaps in particular have taken a beating. Hiren Ved of Alchemy Capital Management expects the large caps to be better placed than the midcaps in the recovery cycle. He is also hopeful of healthier earnings in 2013 as compared to 2012.


"I would say that some selected midcaps obviously will do quite well, the high quality ones. But, I would still say that the larger companies are better placed in the early stages of a recovery cycle," he explained.


According to Ved, there is excessive government regulation meddling in the oil and gas sector and in order for the public sector oil firms to outperform the market, there is a need for follow through on diesel.


As far as earnings are concerned, Ved expects Maruti to perform in line with expectations. He continues to remain bullish on Tata Motors and Maruti Suzuki. He also informed that they prefer larger public sector banks but, would largely recommend investors to avoid smaller PSU banks.


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At the moment, Alchemy Cap has increased their exposure to auto ancillaries and the print media and Ved sees an opportunity in midcap IT also. Besides, he feels that midcap IT is better levered to rise in discretionary spend and its valuations remain reasonable with no balance sheet issues.


Ved is not very optimistic about the consumer staples and has therefore, trimmed his exposures to the sector.


Here is the edited transcript of the interview on CNBC-TV18.


Q: What’s your explanation for the kind of poor breadth and midcap carnage we have seeing for the last 10 days?


A: This typically happens during the base building process. It’s not going to be a one way up. Also, I think the last we saw, we always track this which is the trailing valuations of the midcap index, CNX midcap to the largecap. While the 10 year average has been a 200 basis point discount, whenever we come very close to that discount gap, you see a sell off. So it is going to be a slow recovery.


I don’t think that unless and until there is real earnings recovery happening in some of these midcaps, you will see a sustained rise there. If you really look at the results right now, then I think the largecaps have been doing reasonably well. I think that’s one reason. This typically happens.


In January you have this whole risk on rally, everybody is trying to pre-empt what will happen in the budget or some policy moves will happen and then there are a lot of speculative positions which are built accordingly. If there is no earnings follow through, then typically that kind of a rally disintegrates. It is just one of those usual processes of cleansing that’s happening in the market.


Q: I want to ask you about the point that you mentioned - this dichotomy or divergence of performance between largecaps and midcaps. It has been apparent in the first 10 days of this earnings calendar. Do you see that continuing over the next two quarters as well that blue chips report much more stable earnings than many of these midcaps?


A: I think so. If we really look at things on the ground then I think they are not still very great. I think it’s going to take a while. We tend to pre-empt a lot of things. I think that the largecap companies have far better resilience in terms of managing their cost and margins as compared to the midcaps.


The midcap does well when you actually see a turnaround at the ground level. When things start to move then, they are kind of a leverage play to a rising economic growth. Right now, I would say that some selected midcaps obviously will do quite well, the high quality ones. But I think that if you ask me, largely I would still say that the larger companies are better placed in the early stages of a recovery cycle.


_PAGEBGREAK_


Q: What's been singled out for punishment in the last few days is once again the high beta space, companies with slightly stretched balance sheets. Do you expect to see continuing pain out there for a few more quarters? At the start of the year, at the end of last year, people were talking about buying more of cyclical, more of high beta, expecting growth in 2013. But that seems to have changed around a bit in the last 10 to 15 days.


A: Some of these companies have been able to de-leverage their balance sheets. Those who have been able to de-leverage their balance sheets and where the core earnings have actually grown, those guys have been able to sustain their market caps.


It is very difficult that in a large universe of companies like this, everybody will be able to do that. We just recently saw Jaiprakash Associates put off the Jaypee Infratech's offer for sale. Obviously, the whole idea was to look at de-leveraging and that hasn’t been easy to do. So the process will happen. Some of these companies who are attempting to improve their balance sheets and P&L will do well but, you have to be very selective and it is not going to be a very easy process.


Q: What did you make of what the government is trying to do with the oil companies? Did it change your view dramatically about how you are approaching that entire oil and gas space both upstream and downstream now with what is proposed in diesel and what the market is sensing about gas prices?


A: That is one area which especially people like us never participated in because we always thought that there was too much of government regulation and meddling which was going wrong. With higher oil prices and budget constraints, these companies would be stocked with subsidies on their balance sheets.


But, there has been a breath of fresh air there. I must concede that what the government is trying to do is something which is very sensible. After a long time, the political environment is allowing some of these long overdue steps to be taken. The market has rightly rewarded these stocks in the first phase.


What I would like to see is a kind of sustenance of something like this and it is not just a very smart move to help the disinvestment of some of the oil companies. But, if this is carried forward to its logical conclusion which means that we have the second and the third diesel price hike, we actually do get a gas price hike.


This sector then becomes a very serious contender for considering it for long-term investments because this is where I think there could be significantly more upside, if the reforms are far more structural and I think we are getting in that direction.


Q: How are you approaching the entire auto space now because some difficulties have cropped up? Hero Motocorp is battling with labour issues. We have got issues with Tata Motors on JLR, Ashok Leyland with the commercial vehicle (CV) cycle. What is your exposure in autos looking like now?


A: We don't have much exposure to two-wheelers but, we do have some exposure to Tata Motors and Maruti Suzuki. Tata Motors JLR coming with a profit warning was a little bit of a dampener but, I still do believe that in the longer-term there is a play out there.


As globally things stabilize, they have a very strong product line and the very fact that they are increasing their capex means that they are very confident about their volumes going into the future. While there has been a bit of a setback, we still like that name and we continue to hold it.


Maruti after a low base last year should do well this year. On the whole, we are still positive on auto and it is a better way to play the interest rate cycle and the recovery in the markets. I think people are buying something like Tata Motors right now for JLR and the domestic car business is struggling and so is the medium and heavy commercial segment.


But, if indeed over the next few months, the government is able to resolve some of the issues on infrastructure and mining, that could be an interesting thing where medium and heavy commercial vehicles could bottom out and start to move up because they generally fall late into the cycle and rise late into the cycle. There is an additional play there and let us not forget that Tata Motors is still one of the largest CV players in the country. There could be an upside two quarters down the line in the CV segment itself and therefore, we continue to remain bullish on those names.


_PAGEBREAK_ 


Q: You have seen the first of the public sector bank results, mostly not great. One month back everybody was talking about how Public Sector Undertaking (PSU) banks should close the valuation gap with private sector banks. After these numbers, does it look like the argument is not that strong?


A: I agree. It is also very reflective that we all tend to pre-empt it in our mind. But, for things to actually work out might take a little more time. I think that it is still going to be a mixed bag for PSU banks and here again, I think that people have been trying to play the smaller PSU banks.


But, I think that if at all one has to play this cycle, you have to go with the bigger ones because I think that their balance sheet size would be more capable to take the shocks rather than the smaller companies or the smaller PSU banks. I agree with you that it has not been such a great read on the numbers as yet, so I would not jump the gun there.


Q: What do you do with the consumers now? In the last two months we have been hearing investors say that valuations are excessive. Maybe it is time to tone down. But in the last few days, once again people have started talking about a drift back away to high quality from high beta. How are you positioned in some of these large cap consumer names?


A: One of the things we did was that over the last few months, we have been trimming our consumer staples. But, we have continued to remain invested in the consumer discretionary side because I think there is a far longer play and the valuations, while in the short to medium-term could have reached the top end of the curve, are also going through a meaningful correction.


After a 15 to 20 percent correction they should be alright and as long as they can grow their earnings, they will continue to be in favour. It is just one of those moves in the cycle where something outperforms and then it corrects, moves sideways for a while and then comes back.


I think we are in the middle of that correction and consolidation process. We have trimmed a little bit of the staples because there we think that the valuations were definitely at the higher side, but the consumer discretionary is where we have continued to hold on.


Q: What are your big bets for 2013? Given how well we did last year tactically, how are you positioning yourself this year?


A: We got some money from trimming some of our consumer names. We have put some of that money behind auto ancillaries. Motherson Sumi was our big conviction bet and it remains our big conviction bet. We have taken some exposure to other ancillaries like Amara Raja which has been doing quite well.


We have recently reallocated some money to the print media sector where we think that things seemed to be bottoming out and cyclically, there could be recovery in the ad space. So media is another area where we are looking very seriously. We have taken some exposure there. We will probably enhance our exposure.


Midcap IT is another space where I think there could be opportunities. So we are looking very seriously there as well. It is not terribly different from what we did last year. We still believe that we will look at things bottom-up. If you ask me the areas where we see opportunities, I think media is one and we are also looking at oil and gas pretty seriously. Otherwise, it is more bottom-up individual stories that we are looking at.


Q: You mentioned midcap IT. There has been a lot of caution on that space after the recent misses from companies like Hexaware Technologies, Polaris, Geometric. Do you think you could find value there?


A: I think so. The reason why I believe that is if you go by what Tata Consultancy Services (TCS) said, the big guys are seeing some kind of stability. TCS mentioned that they expect the discretionary spending to move up.


While some of these big guys will also do well in 2013, the midcap space is a levered play on any increase in discretionary spending and one will have to be selective. I do not think that the broad brush is doing well. But, I think there are opportunities in individual names where they are very strong in certain verticals and they could probably do well.

Valuations are still pretty reasonable and they fit all the other bills in the sense that they do not have any balance sheet issues. They have cash and some of them are doing smaller acquisitions and they could still grow.

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