After sugar decontrol, the kind of poor return on equities (ROEs) that many sugar companies are generating because of the levy sugar quota will not be there, says Phani Sekhar, fund manager, Angel Broking.
Given the amount of volitality seen in the market, investors should not just go by sectors or particular themes, feels Phani Sekhar, fund manager, Angel Broking.
"In this kind of a market this is extremely company specific, even within sectors you have disparate performance coming out of different companies. So, earnings outlook remains paramount for any investment decision," he said in an interview to CNBC-TV18.
He recommends investing in good quality midcap stocks, large-cap IT, pharma companies and large private sector banks where earnings outlook is reasonably certain over the next three quarters. "As valuations are not very expensive, there is a good chance of getting 15-18 percent returns," he added.
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Here is the edited transcript of the interview with CNBC-TV18
Q: The pocket that saw a lot of action this week was sugar. Although many people believed that the crucial issue of cane pricing was left untouched, but there were a couple of other issues like the 10 percent levy that was abolished, the release mechanism as well. What is your view on what came through and if there is any kind of incremental gains that you would see on any individual stocks, which one would it be?
A: It was certainly a welcome decision although a bit delayed because at least the Centre addressed two contentious issues. However, in the medium term, cane pricing is going to be very sticky because at a time when the market prices of sugar will increase, the state governments will use their own discretion and may ramp up cane pricing to very high levels. Many of the sugar companies will not be able to reap on commodity boom.
Having said that, the kind of poor return on equities (ROEs) that many of these sugar companies are generating because of the levy sugar quota etc, will not be there. So at least from here on there is at least 10-12 percent gains still left in the short to medium term, and from there we need to see what the stance of state governments like Uttar Pradesh on cane pricing is, as and when the new sugar cycle begins in August or September.
Q: So do you have any top picks in that space?
A: Not really, because many of the companies out there have very poor balance sheets. In this kind of an environment you do not want to buy a company with debt-equity ratio of more than one. So with that kind of debt investors can clearly avoid it but it is certainly interesting to wait and watch as to what happens. So it is an evolving sector and to that extent investors will do well to keep it on radar.
Q: If you take stock of the entire situation, the question you ask yourself is with the market at a six-month low and stocks at such attractive valuations, should I be putting my money into any stocks? What would the answer to that be and if you could give us a couple of stocks that you would put your money into?
A: The first thing investors need to do in this kind of market is not to go by sectors or not to be tied down to particular themes because that is what many of the investors do. So in this kind of a market this is extremely company specific, even within sectors you have disparate performance coming out of different companies. So, earnings outlook remains paramount for any investment decision.
So I would tend to go with themes such as large cap IT or large cap pharma or utilities, large private sector banks because this is where earnings outlook still remains reasonably ascertain over the next three quarters or so. And valuations are not very expensive and there is a good chance that you can account around 15-18 percent returns.
As far as ideas are concerned, as long as you are in good quality midcap stocks also, you can make money. Stock like ING Vysya Bank is something that I would recommend because it has been growing its CASA (current account savings account) franchise at a very good pace of 32 percent. Asset quality is the best among the peer assets, the net nonperforming assets are to the tune of only 0.2 percent and valuations at just 1.5 times and a loan book that has started growing over the last four quarters or so presents an excellent opportunity from the investors.
Similarly within the utility space, Power Grid is something that would merit a close attention post the correction from Rs 120 levels to Rs 105 because with a regulated return profile of around 14 percent ROE, I think that much of the pessimism in the stock for example investors are vary about what will happen beyond FY17. Now, that is a very long call to take. So over the next two-three years, as long as you know that they are going to grow their assets by around 16-17 percent, earning ROE in excess of 14 percent, then it is a good stock to buy at these levels.