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Dec 13, 2017 04:40 PM IST | Source: CNBC-TV18

The year 2018 will be all about individual stocks; 6 sectors looking attractive

The market is unlikely to break out in a hurry and sectors which did well so far could underperform in the next one year, while the beaten-down sectors such as PSU banks, roads, metals, industrials etc. will remain in demand in the next 6-9 months.

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The S&P BSE Sensex rallied by about 25 percent so far in 2017, largely on the back of P/E re-rating while earnings stayed flat. Going into 2018, earnings are likely to pick up and P/E multiple could see de-rating, Manish Sonthalia, Head Equities- PMS at Motilal Oswal AMC said in an interview with CNBC-TV18.

The market is unlikely to break out in a hurry and sectors which did well so far could underperform in the next one year, while the beaten-down sectors such as PSU banks, roads, metals, industrials etc. will remain in demand in the next 6-9 months.

Here is a list of top 6 sectors which are looking attractive:

Banks:

NBFCs which outperformed benchmark indices in the year 2017 may underperform in the next 12 months. “We are going to see rate increase sometime in FY19 and rates are going to harden with inflation and twin deficit coming back could weigh on NBFCs,” said Sonthalia.

Dairy:

The dairy theme is likely to do well given the fact that PM Modi plans to double the farm income in the next 3-4 years. In the dairy sectors, the focus will be on companies who are selling liquid milk rather than value-added products because the work capital cycle and cash conversion cycle is much more favourable in liquid milk.

Midcap IT & Pharma:

In the Midcap IT segment, Sonthalia likes L&T Technology Services and in terms of pharma space, we are betting on Ipca Laboratories, and Alkem Laboratories.

Gas stocks:

We are positive on City gas distributors — Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL). The economy is moving towards a gas economy which augers well for both the stocks. The valuations might look stretched but with PNGRB having a chairman, decision on new notified will come soon which will be positive for both these companies.

Real Estate:

Real Estate is entering into interesting times going into the future. The whole retailing space and residential housing space is witnessing a shift from unorganised to organised. The known industry plays are likely to see a bigger traction in terms of volume size as opposed to lesser known ones.

Jewellery:

In the jewellery space, Sonthalia likes Titan Company Ltd. The company is a major thematic play on the unorganised shifting to the organised. The hyper growth is here to stay.

Below is the verbatim transcript of the interview.

Anuj: For a portfolio manager, the last few weeks, few months have been quite volatile. What are your thoughts on what is going on right now and are you 100 percent invested right now?

A: By default and design we are invested at all points in time and we don’t keep cash. Yes, I think the markets have been in a range from 9,500 to 10,400. We don’t think the markets are going to breakout in a hurry, it is going to be a sideways movement. All this while we have seen a P/E re-rating in the market with no earnings growth, now we are about to see earnings growth, but P/E de-rating. So it is all going to be about individual stocks that you hold in a portfolio.

Latha: Let us come to individual stocks, the classic divide in the finance space, NBFCs were leading, will they continue to or will you want to switch to banks?

A: NBFCs I think will underperform for the next one year or so. Of course we are going to see a rate increase sometime in FY19 so to speak and obviously rates are going to harden with the inflation and twin deficit coming back. So from that point of view, NBFCs would be in a lesser advantageous position when compared to banks. So it would be banks which would be favoured in place of NBFCs at least for the next one year.

Sonia: Tell us a little bit about what the sectoral trend could look like. You just spoke about NBFCs, but going into 2018, which are the sectors that you would prefer, is it still consumption on top and how would you deal with some of these beaten down sectors that are now coming back into action like telecom, etc.

A: You are right, the sectors which have done well so far, I don’t think are going to do that well over the next one year or so. I think it is the beaten down sectors, the PSU banks, the roads, the construction companies, the metal companies, these are some of the sectors and we have seen with the Index of Industrial Production (IIP) numbers also, the capital goods space for three months in a row is starting to show an uptick and of course all of that is going to see some rub off impact in the prices of stocks. So industrials, these would be the sectors that would be in demand over the next six to nine months at least and those sectors which have done well, maybe they will just go through some time correction.

Latha: Will you shift from consumer oriented stocks, say like for instance staples and consumer discretionary maybe to more now investment oriented stocks say capital goods or cement?

A: We have a blend of both consumption and industrials in our portfolio.

Latha: I mean the accent, will the accent shift, will the balance shift towards investment oriented ones?

A: I think we are more positively inclined towards consumer staples at this given point of time given that inflation is coming back in the economy -- of course valuations are a concern for the near term, but we have lived through long periods of high valuation and we do not want to shift from consumer staples per se, consumer discretionary would be a pick and choose and industrials it would be somewhat of an overweight stance going forward.

Anuj: In terms of stocks, your thoughts on a stock like Maruti Suzuki which has made new highs consistently. Do you think stocks like these will continue to get re-rated?

A: I don’t think so. P/E valuations are just out of the whack and there is just one auto play that you can have in the passenger car segment or in one out of every two cars sold in this country and you don’t have a proxy for anything else but Maruti. So it is a crowded trade out here; don’t want to bet my money at these prices on Maruti.

Sonia: Come in on some of these pockets that are now starting to get better valuations or rather valuations as per what the bigger FMCG companies get. Any thoughts or any interest that lies here in some of these spaces like dairy, etc.?

A: Dairy would remain in focus given that our Prime Minister is wanting to see the farm income double over the next three to four years. Of course dairy would be a central part of that. However, I think on the dairy front, I would be more focused on guys who are selling more liquid milk as oppose to value added products because the working capital cycle and the cash conversion cycle is much more favourable in the case of liquid milk as oppose to value added products, etc. where the working capital cycle is pretty big and of course valuations, at what valuations we get them, However, yes, dairy would be a good theme to play for the next three to four years. We have to pick and choose our stocks in that.

Latha: I don’t know if you dabble in all those China related stocks, the chemicals and the Graphite and stuff like that. Is the best over, over there?

A: No, in fact coming on these consumables and which are catering to the steel sector, of course it remains to be seen how long this price increase can sustain. Our sense is that it can only sustain above a certain threshold steel price. However, there is still a lot of run up that is remaining in these stocks. I think the profitability for the next one year or so could be around Rs 2,000 crore odd for let us say a Graphite or HEG and whether the valuations actually capture in all of that, remains to be seen.

Anuj: Are you taking any bets in midcap IT or midcap pharma? We have seen stocks like Granules, which have done well, there are couple of stocks in the midcap IT which have been phenomenal movers like Hexaware or Tata Elxsi.

A: I like Larsen and Toubro (L&T) Technology Services, engineering research and development (R&D) wing of L&T.

In terms of the midcap pharma stocks, we have Alkem Laboratories and we are betting on Ipca Laboratories.

Sonia: What about the aviation space because now higher crude prices is putting a bit of pressure as far as operations are concerned but passenger traffic growth has been robust for the last many months, you still see better prices or better levels in the aviation sector?

A: Surprisingly, the Q3 which is supposed to be a busy season -- the ticket prices are lower when compared on a year-on-year (YoY) basis and at the same time, fuel costs are actually going up. In fact, Q3 we are in for some negative surprise as far as the aviation stocks are concerned.

I don’t think we will see a decent numbers from the aviation companies in Q3.

Latha: What are any sunrise themes that you may look at?

A: Insurance is one space which will gain traction going forward. Of course if you want to call it a sunrise theme. There will be a lot of more penetration that would come in, asset management companies would be another sunrise themes. So these will be some of the interesting names that we want to zero-in on.

Latha: Real estate and housing finance both have run up significantly, in which will you persist?

A: Housing finance is about to go through some correction given that they have run up significantly.

Real estate is in for interesting times going to the future. Of course this whole retailing space and even within the residential housing space, it is all a shift between the unorganised to organised. So the known industry players are going to see a bigger traction in terms of volumes as opposed to the lesser known ones in the real estate regulatory authority (RERA) regime and the insolvency and bankruptcy code (IBC) regime.

Anuj: United Breweries is now trading at high point of the day. Liquor stocks, do you have anything in the portfolio?

A: No, not really. But the interesting thing to note out here is the margins may sustain. The Q2 margins that we see for the liquor stocks may sustain going forward. We are watching this space quite closely and the sustainability of these margins would warrant a second look on these stocks.

Anuj: What about gas stocks, we have seen a big rally in all these stocks, stocks like GAIL India, Indraprastha Gas Ltd (IGL), anything that you want to buy right now?

A: Very positive on CGD companies like Mahanagar Gas Ltd (MGL) and IGL.

The economy is moving towards the gas economy and of course near-term valuations can be argued to be rather full but I think with the PNGRB now having a chairman, decision on new notified areas are going to come soon and that would be quite positive for both IGL and MGL.

Latha: Jewellers?

A: We have Titan. It is the big name. They are in for very interesting times and again it is a major thematic play on the unorganised shifting to the organised players. Hyper growth is here to stay for some time to come.

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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