Bullish on TRF, HEG, TCS: Emkay Global

Q: We are making new 17-month high almost on a daily basis now. What's your sense? Are we close to the top or do you think there is still some steam left?

A: I have stopped guessing what the index will do. We recently put out a note on lifetime highs where we started seeing stocks touching lifetime highs. We saw that we should look at the market in that sense - just try to pick out stocks, which we feel will have value and finally when our investors look at our institutions, they look at more of out performance versus underperformance. So given the fact that liquidity is driving the markets and I don't have a clue as to when liquidity end or how long this liquidity volatility will continue. I have stopped guessing on the market. So we look at stock specific that's been our strategy for last three-four months.

Q: How comfortable are you with the valuation concerns right now? How long do you think the market will discard these stretched valuations and do you think maybe now it will slowly start to act up as far as some of these sectors are concerned?

A: Valuations always tend to catch-up but we have done the study in the past. We had put out a note - liquidity versus valuations. We have seen that there have been extended periods of times, some time stretching up to 8-9 months where the liquidity continues to drive the markets and the valuations keep on moving up. We are about 5-6 months now into this rally and you still have some more time maybe till the time you can see some bump off of the valuations.

Q: Looking at that report of lifetime high companies - the top three ranked companies are Sesa Goa, Nestle and Coromandel Fertilisers. Would these be your top three picks as well?

A: Not necessarily. What we try to do is - we looked at all the companies which have touched lifetime high. We looked at the characteristics because this was the effect, so we try to look at the causes. We found that in the causes the high return on equity (RoE), high return on capital employed (RoCe), free operating cash flow and free cash flow and low debt to equity played a very prominent role.

So what we did was as one of the themes in portfolio construction, we thought that companies which are looking good on these parameters are the ones which we should look at.

Q: Couple of midcap picks from that report TRF and HEG. Why are you bullish on these two stocks?

A: If you look at TRF, it's in the space of construction - material handling equipment (MHE) space - and that's been doing well. They have been receiving orders. This company is turning out a robust order book now. Their earnings momentum has picked up, so we feel that this stock is good story at this level given the macro picture in the MHE segment as well.

I don't know much specifics about HEG but my analyst would talk details about that. But we find that they have hydropower business, which is valued and the graphite business - the graphite business is still trading at about 6-7 times price-to-earnings, so almost a power investment which they are going to do and they are doing and earnings revenues from there are available at absolutely throwaway valuations.

Q: How are you placed on the entire information technology (IT) pack right now? Are you concerned a little bit about the rupee appreciation, the margin sustainability? Is there anything from that space that you particularly like?

A: After the recent outperformance of the IT sector, we feel that the recent appreciation of the rupee could put a dampener on the performance of the IT stocks. Though IT stocks were at the top of our list over the last three-four months but given that they have performed really well we feel that they will stabilise or come off a bit from these levels.

The story still looks good, though growth is fragile. So any small appreciation in the rupee could also hurt earnings. However, in this space, TCS has shown superior performance over the last two-three quarters and we feel that its out performance to Infosys will continue.