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Apr 04, 2016 12:56 PM IST | Source: CNBC-TV18

Bullish equities from 1-2 yr horizon; like Infosys: Dipen Sheth

Sheth is bullish on Infosys, saying the stock is in a bull market of its own, led by strong leadership. He feels with a steady improvement in quarterly earnings, the stock's valuation can increase from 16 times forward earnings to 20 times forward earnings.

Dipen Sheth of HDFC Securities is bullish on equities from a one to two year perspective, he tells CNBC-TV18. Sheth's bullishness arises from the improvement in macroeconomic conditions.

However, Sheth cautions that monsoon is still cause of concern for now. 

Sheth is bullish on Infosys, saying the stock is in a bull market of its own, led by strong leadership. He feels with a steady improvement in quarterly earnings, the stock's valuation can increase from 16 times forward earnings to 20 times forward earnings.

Atul Auto is the other stock Sheth is bullish on, with the company developing an in-house petrol engine. Sheth says the stock is a 'buy on dips'.

Below is the verbatim transcript of Dipen Sheth’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Do you expect this bonhomie to continue?

A: We don’t live for the ides of March or get rattled by few worries in April, having said that we have seen this big run-up 10-12 percent from recent cracked levels and look at those foreign institutional investors (FIIs) inflows. The domestic blocks are selling, I wonder why? So, may be they are seeing redemptions and if those redemptions are happening someone, a huge swayed of the investing public is now trading out. I am not too happy to see that but be that as it may.

So, not a one or two months view but if you tell me in a year or two from now I am extremely bullish on how India is shaping up especially in the weak global environment. However, after a 10-12 percent run-up and a scorching heat wave nobody is talking about it. The monsoon as ever is a roll of dice. The El Nino and the La Nina all that will get agonised over in a bit I guess, in next few weeks. May be there is, we are going to take a breather of sorts in a bit. However, it is very difficult to get the short-term right.

Latha: Let us start with the IT itself. That is less of a rain play so Ashwani Gujral just spoke to us about how Infosys is in a bull run of its own. Do you still back that stock at current valuations as well what about the midcap? That is where all the deals are happening. Geometric, MphasiS, Hexaware Technologies what is your midcap IT view?

A: So, largecap Infosys is in a bull market of its own driven by transformational leadership and rejuvenation and internal revamp of sorts which is bearing fruit now. So, at 16x is the story over? Certainly not, if I look at FY18 numbers, so at 16x there is scope to go all the way to 20x. So, this is going to be a seasonally strong quarter and you will hear about more deal wins and better guidance and so on so forth. I don’t think the Infosys story is anywhere near getting over and I have been saying this for a fairly long time on your channel.

If you look at the midcaps, you are absolutely right it is getting driven more and more by transactions and deal flows and so on. However, that said some of the midcaps who are in unique niches on their own have now broken out and are flowering, if you look at my old favourite Majesco which is a product company. Last week I was in Chennai and met up with the folks at Intellect Design – we don’t have them under coverage but too large or shall I say USD 100 million plus listed product companies out of this country, I think something is changing in IT.

The digital transformation bit and all that and we were worried about it and that is still valid. The large services companies are aggressively finding ways to get over that hump in the business. However, some of the products companies will also do very well in the days to come.

Sonia: Let us talk about some of the other spots that are doing well. One of them is autos and we have two stocks that are hitting new highs everyday almost Ashok Leyland and Hero Motocorp. Where do you see higher value?

A: On both the story remains one off a revival or a takeoff from the expected trajectory of the business. In Hero Motocorp the worry was always that when will they get volume growth? There is increasing evidence that the volume growth will happen; one, driven by a rural demand which is going to takeoff given the government’s increased focus on agri and rural welfare spending. Two, the prospects of a good monsoon how much ever we might argue now a third bad monsoon looks a little bit of an outside chances of now.

Their prospects in global markets not withstanding global slowdown but given their product range and given their newly rolled out technology the new models, so whether they will in African markets , South American markets and so on are they going to do well? There is increased evidence that yes that is likely; very high return ratios, so lots of cash getting spewed out so opportunity to build out, dealer networks and all that.

Again like Infosys the jury was out on whether the management would get it right after a tough phase in the business. Everyday there is incremental evidence that they are getting it right. So, this is one stock which is due for a re-rating before analyst could do it I think the market has gone out and done a bit of that.

Latha: Would you expand this to a rural growth story because Escorts and Mahindra & Mahindra showed very strong tractor sales volume? However, if you looked at their talk Escorts said that after a 12 percent fall this year they may show some growth so they are not going to get back to FY15 volumes. It will be better than FY16 but it is not going to be as much as FY15. Bajaj Auto perhaps if you net out this year trough and next year’s growth their best case seems to be some 8 percent growth over FY15. Is it already in the price?

A: Keep in mind that all these blocks in the auto space are looking at much lower steel prices now than they were looking at one year ago. So, even with the same volumes now the guys who have that pricing power, the guys who can actually avoid passing on the benefit of lower steel prices to their end consumers remember these are all very strong brands.  

Latha: Which are your buys then?

A: Mahindra is due for an upgrade of sorts but remember that the rural business is one part of their overall business. So, we will have to wait and watch what the other parts of the business do and the kind of news flow and commentary that comes in from there. We don’t have Escorts under coverage. I wish we did. So, that one has been a mixed bag. If you look at a longer term then you will notice that it has gone through fairly unpredictable troughs and peaks in terms of corporate performance. So, I am not so sure what is happening there in any case we don’t have them under coverage.

Sonia: I was going through the note that you sent us and within that, you talk about some of these auto stocks, like Atul Auto, etc. that you have watched very closely. We were just going through the sales numbers this month and for the month of March, sales for the companies actually slowed down to low single digits. It is just a 2.5 percent growth. What do you do at a time like this? These are companies that have given you great returns so far, but now seems like base effect is catching up and slow down is under way.

A: In Atul Auto’s case, the addressable opportunity is rising dramatically. Yes, the March numbers were soft. We were expecting higher numbers. So, a little bit of monthly miss is always to be expected. They are building out their dealer network. They are building out a new plant which will double capacity from the existing 60,000 to 1,20,000. Remember, this is a company which can compound continuously here on for I do not know how many more years, because they have still got something like a 40,000-45,000 volume in a 10,00,000 volume market. And half that market was unaddressable for them because they did not have a petrol model. So, they only had diesel models across sizes and ranges. And now, they have developed an in-house petrol engine.

We are betting on it. The risks are great in terms of commissioning or designing and rolling out an engine from scratch. There is some evidence with us in our research that tells us that they have got it right. They have got an industry veteran to build it up from scratch and they are working at 35-40 percent kind of return ratios. So, a high return ratio company with a very large addressable opportunity misses numbers on a couple of months here and there, at 14x again on FY18 basis, if memory serves me right, I think there is not much to worry about. In fact, investors should buy into any fall that might happen here on.

It is a very low capital employed company in terms of the kind of output that it does. So, you look at revenue to capital employment, you look at asset turns and so on, they are magnificent.

Latha: What about cement companies? They have all run up significantly but you still have a buy on the midcaps.

A: I do not have a buy on companies which have USD 200 per tonne kind of valuation. Remember, cement is after all a commodity and it will go through cycles. What looks like a very exciting cycle right now, after a while might look like not such a great cycle. So, the largecaps, many of them are at USD 180-220 per tonne and so on and we really do not have too much confidence there. We maintain that they are great companies. Are they going to be great investments here on is the question.

So, if you look at an Ultratech Cement or a Shree Cements, there is no doubt to my mind that these are magnificent operations, but when you compare them to a Sanghi Industries or an Orient Cement, for example. Remember, Sanghi is again a classic example of compounding. In fact, this morning I read that they had flipped their debt and placed debentures privately, about a Rs 260-280 crore odd placement and they are effectively out of your corporate debt restructuring. And look at the valuations – Sanghi would be USD 64-65 per tonne, Orient is at USD 80 per tonne. These are also great operations, why should they not get the kind of multiples that the largecaps are getting at USD 200 per tonne.

So, USD 120-130 per tonne valuations for these are justified if you are so gung ho on the cycle.

Sonia: So, for the market as a whole, what are you factoring in, in terms of earnings growth for FY17? And based on that, what could the upside on the market be?

A: I guess we might see something like a low double digit earnings growth in FY17. I will tell you why low double digit, because there are lots of parts in the global economy which will affect Nifty earnings in ways that we cannot predict. So, for the IT blokes, it is easier to predict, but for some of the commodity heavy guys, it is going to be very difficult. And remember, even guys like an Oil and Natural Gas Corporation (ONGC), their earnings are dependent on what global crude prices are and not so much of what happens in India. So, even with a high single digit or a low double digit kind of growth, the Nifty should go somewhere. I think the argument for being optimistic on the Nifty is not so much of Nifty earnings growth as it is about structural change in India and which should attract a higher multiple.

Even if there is single digit growth, if you up the multiples a little bit a year out from now, you could see the Nifty at at least 10-15 percent higher levels. But it is not going to be an even path. I am sure it is not going to be an even path.
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