Time to shop: UBS India shares the midcap must-have list

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Time to shop: UBS India shares the midcap must-have list

In an exclusive interview to CNBC-TV18, Gautam Chhaochharia, head of midcap research at UBS India shares his list of midcap stocks and the model portfolio created. Picking market leaders or strong business models, he says the picks are companies that should do well over next couple of years.

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In an exclusive interview to CNBC-TV18, Gautam Chhaochharia, head of midcap research at UBS India shares his list of midcap stocks and the model portfolio created. Picking market leaders or strong business models, he says the picks are companies that should do well over next couple of years.

He picks Exide , Pidilite , Havells , Bajaj Electricals , Redington since, they are names that are exposed to non cyclical and have an untapped demand. "Also, Coromandel has huge untapped opportunity in agriculture and so does Cholamandalam Finance , which is exposed to almost non-cyclical light commercial vehicle funding business," he adds.

Below is an edited transcript of Gautam Chhaochharia's interview to CNBC-TV18. Also watch the accompanying video.

Q: What kind of themes you are breaking up you midcap model portfolio into?

A: We are broadly looking at three buckets -market leaders, secular ideas, long-term business models, second bucket is cyclical, which are more of a one year near-term plays based on industry cycles turning and valuations being attractive and third is more deep value institutional companies. We have broken it up into these three buckets also because of varying levels of investor interest and these different buckets do perform differently in different market sectors.

At this stage given where the market is, given the muddled outlook globally as well as some bottom-up issues in India, we are looking at increased focus. The names in the first bucket that are clearly the market leaders or strong business models because we don't know how things will pan out over next couple of quarters, both in terms of global macro as well as local issues, so we want to look at companies which have strong business models and should do well over next couple of years. For example, Exide, Pidilite, Havells, Bajaj Electricals, Redington even names which are exposed to non cyclical and even untapped demand like Coromandel given the huge untapped opportunity in agriculture and company like Cholamandalam Finance which is exposed to almost non cyclical light commercial vehicle funding business.

Q: To understand the approach a bit better, for example, something like Exide - is it about market share because of which you think this is a leader in the battery segment because Exide has also had a couple of tricky quarters? How much does financial performance wane and how much clear market share within the market itself?

A: We are looking at it from two-three year perspective. Last couple of quarters have been tough for Exide, next one-two quarters might again be tough but the market structure is very favourable. Also, Amara Raja has been generating very strong cash flows, they have strong balance sheet, RoEs are very impressive. So, in that context we are comfortable with long-term outlook for growth in demand as well as market structure. The market structure in our view will remain favourable. You might have volatility across quarters, in terms of market share but long-term they should be able to maintain market share.

Q: Can you give us an example from the cyclical basket, what kind of stocks you will be talking about there?

A: We have few ideas on the cyclical bucket - Apollo Tyres , United Phosphorous , Sintex , Voltas . If you look at United Phosphorous, the global agrochemical cycle is turning around but we haven't seen this stock do well locally. This stock is trading at discounts to global benchmarks so, we do expect with couple of good quarterly numbers the stock should do well.

Apart from that, if you look at Voltas and Sintex the capex cycle is very difficult to predict, there are lots of moving parts there but you want to buy this space when things are not going great for them. On the longer term, you are very sure of the outlook. For both Sintex and Voltas, we remain comfortable on the long-term outlook but near-term pressure points remain.

Q: What kind of faces would fall into the special situation or deep value category? Is it only a valuation call there or is it also issues such as potential buybacks or higher dividend yield or company that could go in for a delisting a few quarter down the line?  Are you looking at those kinds of stories too?

A: Yes, all of those. Primarily starting from deep value but we are looking for specific catalyst like the ones you mentioned and apart from that corporate restructuring or some of the parts deep discount value.

Q: What kind of faces would fit that list?

A: If you look at names which we have there like Tube Investments ; they have big stake in Cholamandalam Finance which is not reflecting the stock price, stock looks dirt cheap. Second, we have couple of companies in mining space where because of concerns on existing steel cycle as well as on the mining industry environment, right now we are not giving any value for mines which can have huge impact on financials and valuations over the medium-term. So, we have companies like Monnet Ispat and Jai Balaji in that space.