IT, telecom, aviation: Is this right time to bet on them?

In an interview to CNBC-TV18 Rajat Rajgharia, head of research at Motilal Oswal Securities shared views on stocks across various sectors. He also citied outlook for sectors like telecom, aviation, IT and others.

Given the kind of news flow, he expects investors to remain low on the telecom. "This sector continues to be quite badly impacted. With the reserve price at Rs 14,000 crore, you will see companies being less aggressive while bidding," he elaborated. From the IT space, he is bullish on stocks like Mahindra Satyam, Hexaware and HCL Tech. "We follow a very bottom-up approach on each of these midcap IT companies. Some of them have reported fairly good numbers and that is getting reflected in their stock price." Further, he pointed out that aviation sector is getting structurally favourable for stronger players like Jet Airways and SpiceJet on the back anticipation of foreign funds flowing the sector anytime. He suggested that one can look at these stocks from a trading perspective, but they may not necessarily be suited for investment. Below is the edited transcript of Rajgharia's interview with CNBC-TV18. Q: The week ends with SBI's numbers. After looking at what other public sector banks have done where are you pegging your expectations? A: On the public sector banks we think SBI should still be one of the best banks from a numbers point of view this quarter. Because their net interest margins (NIM) continue to be very strong and second, I think while they will still add NPLs this quarter, the fourth quarter was an aberration. The net increase in the slippages will be much lower than what as a trend we have seen in the rest of the banks. The numbers for SBI should be reasonably good. Our profit estimates are closer to Rs 3,400-3,500 crore, which will almost be the second highest profit after the last quarter profit that they reported. So, SBI should have reasonably okay numbers for June quarter. Q: What did you make of the telecom spectrum reserve price and how would you approach these stocks now? A: This sector continues to be quite badly impacted by all these things that we keep on hearing. Now with the reserve price at Rs 14,000 crore will surely reduce the number of circles that some of the companies may look to bid. This is because the ability to incur this amount of capex is not there in the system. Secondly, if you look at the return ratios for the sector - probably the top three companies continue to earn very low return ratios and most of the sector is bleeding. So, you will see companies being less aggressive when they come up for bidding. Things relating to what would be the policy on excess of contracted spectrum will be more important from an incumbent’s point of view. As of now, investors will remain low on telecom till the time they do not see changes being made, what new pricing policies will come up and what would be the total impact on each company in the sector. Q: A lot of midcap IT companies have done better than their large cap peers in this quarter, Mahindra Satyam being the latest one. Have you upgraded any of these companies or have you changed the mix around in your IT portfolio? A: Large cap ITs have always been in allocation gain. The difference between large cap and IT market caps are so huge that for investors to replace any one company with other is just not possible. We follow a very bottom-up approach on each of these midcap IT companies. Some of the companies like Mahindra Satyam, Hexaware etc. have reported fairly good numbers and that is also getting reflected in the way these stocks are trading. _PAGEBREAK_ We have been lot more positive on stocks like HCL Tech which is not exactly a midcap, but people have traded that as a midcap and now it is slowly moving up in the allocation gain. It is replacing some of the top three names when people are doing an allocation in the IT sector. Q: We have seen FIIs raising some exposure in the aviation sector after the kind of results that were announced. Is Jet Airways something that you like? A: We do not have coverage on either of these two stocks, but in our interactions we always come across people who look at these stocks more as trading ideas. You are seeing some structural changes in the sector with the competitive intensity now reducing significantly as Kingfisher market share is showing. Jet Airways, SpiceJet are the more prominent plays for people and along with continued media news flow of FDI in aviation; structurally the sector is getting more favourable for some of the stronger players. If you see any of the reforms happening then people are just betting on this sector as a trading exposure. It need not just be an investment idea right now. Q: What about Tata Motors? It would also announce results this week. That’s been a weak stock for the last couple of months. What are your expectations from their earnings and from the stock? A: If you look at the Tata Motors results and the stock price every quarter there has been a surprise now for the last five to six quarter whether it is positive or negative. The trend for that quarter subsequent to the numbers being reported is very clear. You are almost seeing a 25-30% kind of a stock move after every quarterly number till the time the next quarter is reported. When they reported for March quarter, things had slowed down on the margins front. Since then the volume momentum has slowed down on both JLR and the domestic CV cycle. Numbers will look soft for Tata Motors this quarter, which is also what is impacting the stock right now. Even if you assumed the moderated JLR volumes and more normalized EBITDA margins for it, now in this price band of Rs 210-225 the stock has factored in a lot of this moderation. From hereon, we would try to be more positive on Tata Motors to play the up move in the stock from here. Q: The big gainer last week was BHEL that was up 8.5%. What did you make of the numbers this time around and how would you approach the stock from here? A: One thing is very clear that all the analysts in their estimates have started looking at a decline in earnings in FY13 and possibly in FY14. Even on those downgraded earnings the stock now trades at a single digit PE and almost has a dividend yield of 3% plus. We have now started turning quite positive on this whole power sector exposure right now. We think two things, first is that a very definitely solution on this coal FSA along with coal pool pricing coinciding with a drop in imported coal prices can reduce the problems of this sector quite a bit. The best way to play this sector right now could either be NTPC, where earnings growth are going to be more secure or partly through lenders to power sector, be it Axis Bank or a PFC, REC. BHEL would have bottomed out quite well at Rs 200-210. The upmove in BHEL will come later when you start seeing people getting into the investment cycle. We are unsure whether that phase is starting right now or not, but this is a stock where you will have to wait a bit before you start seeing any gains being made. Q: As a portfolio approach what are the individual stocks from the Nifty that would provide alpha from here i.e. the big stocks that are already in a bull market of their own? A: During this entire earnings season we have seen that there is a clear divergence within the performance of the stocks, not just in the stock performance, but also in the earning performance. Four stocks that we would bet upon right now for alpha would include ICICI Bank. They continue to build on very well. Valuation at 1.5 times book is quite reasonable. You should see this stock trading more closer to 1.82 times over the next 12 months and the book itself will be higher by 15%, so that’s a first alpha stock. Second is L&T. It has been a big stock of this 2012 till now continues to do well purely driven by the fact that even in this most head winded environment they are guiding for a strong growth in both their top-line. Margins should hold on well for them. The balance sheet improvement will be a very key catalyst for them. Third would be Dr. Reddy’s. It has now started looking interesting after last 12 months of flat return. Their guidance for this year itself is significantly higher than the rest of the street. These three stocks amongst the front line look fairly okay. Some of the new names like Axis Bank or even stocks like NTPC which are more to play the power sector exposure can be good return stocks from here.