Book profits in midcap stocks: Kotak Institutional Equities

Q: What about something like Tata Motors? Month after month, it is delivering on the Jaguar Land Rover sales front, but there are so many cautious comments out there. At Rs 240 level, what would you do with the stock?

A: Mahindra and Mahindra and Tata Motors are our top two picks in the auto sector. On Tata Motors, in particular we like it primarily because valuations are not still demanding. It’s one of the cheaper auto names, especially if you benchmark to Indian auto names, it’s definitely very cheap.

The issues of concern of Tata Motors are primarily macro economic. If Europe is seeing a slowdown, you have seen the management commentary in the last quarterly results, that’s clearly a challenge. Also, China seems to be having a hard slowdown. So, these are the two macro concerns, which weigh down the stock.

On the flipside, you will see two new model launches coming through. That will help volume growth. On August 15, they unveiled the Range Rover. The Range Rover is their top end model. It’s also the highest selling price model with maximum gross contributions in their product portfolio. So, essentially we think that Range Rover from next year onwards, from calendar year 2013 onwards, can be a big driver to volumes and earnings. Also, XF Sportbrake, a new model and Estate version can add volumes.

They are also putting in a two liter engine. That is good for driving volumes. So, while JLR and especially Land Rover can have good volume growth, the concerns there are primarily macro economic. To that extent, we would still be a buyer of the stock.

Q: Who could provide leadership in the Nifty at this juncture, if we are indeed seeing this wall of liquidity continuing?

A: If we see another USD 2-4 billion come through in the next six weeks or so, I think it will primarily be invested in the banking sector. So, I wouldn’t be surprised, if it’s the consumer names and the private sector banking space, which would still see inflows.

I think the market is seeking safety. SBI was admired for the fact that it atleast stated the fact that the economy is going to take a toll on the balance sheet of all the public sector banks. So, clearly money will avoid risk and to that extent the same sectors would be performers.

The other sector, which can probably add and contribute, is the IT sector. It has still not contributed too much. There have been worries on Europe. That is weighing down those stocks, but we could see that also add to performance.

Q: How would you approach the IT stocks now? Is it an ‘avoid’ or do you think that you stick with the proven winners like an HCL Tech and maybe to some extent even TCS?

A: I would subscribe to the second part. You stick to TCS and HCL Tech primarily because the sector is going through rebasing of growth assumptions for the future. So, clearly the entire BFSI space, which is the key driver for top-line revenues for most of these companies, is going through a prolonged downturn. For how long, we cannot tell. So, I would stick to TCS and HCL Tech. But as a whole we have been cautious on the tech sector.

Q: FMCG stocks are moving. HUL sitting at about 32 times forward PE doesn’t seemed to be worrying anyone. It’s just defying gravity. Would you still consider keeping something like this in your portfolio?

A: Both HUL and ITC are strong stable growth stories. So, year-on-year, the likes of ITC’s cigarette business would give you atleast a 16% kind of earnings growth. Overall, earnings growth for most FMCG stocks would be in the region of 20%.

Valuations go up in times when the market is seeking safety. I don’t expect a significant crisis to emerge on valuations for these names. When we see a broader economic growth come through across sectors in the domestic economy, that’s where some of the other domestic names will start performing. I would still think that we are still in a good period for FMCG names, whether it’s ITC or HUL.