Expert strategies on how to play 5 largecap stocks

The markets have started off 2011 on a sour note, contrary to expectations at the end of last year. However, since the start of the earnings season, things seem to have tempered down a bit with Infosys officially kicking off Q3 earnings late last week. Although there have been no major surprises till date, some negative surprises are to be expected. However, expectation levels always stay at elevated levels going into earnings.

In an interview with CNBC-TV18, independent market strategist, Rajesh Jain, and Shailesh Kanani, Research Analyst, Angel Broking gave their perspective on what they expect some largecap stocks to do going forward. On Bajaj Auto: Jain told CNBC-TV18 that if an investor has the capacity to stick with quotational losses then there is a fair chance of Bajaj Auto hitting Rs 1,400-1,500 level over the next one year. He said, "One of the key strengths of Bajaj Auto has always been a favourable product mix and an existing export market. The favourable product mix will probably skew a bit in favour of Hero Honda because if you are going to see inflation and higher interest rates then consumers will tend to downtrend and it will be the cheaper models that will sell more. But that is one part of the product portfolio which Bajaj Auto has worked on." He feels, some of the sharp volume gains and market share gains that the company has seen over the last one year, barring the last two months, has been on account of the launch of sub-125CCs and some cheaper models. Jain added, "I think Bajaj Auto is well equipped to face a challenging economic environment and should we see inflation and higher interest rates, I continue to expect both Bajaj Auto and Hero Honda to continue to push the numbers because there will be consumer downtrading and two-wheelers will continue to sell like hot cakes and a fair 10-15% volume growth should not be ruled out." On exports, Jain said that with Honda and Hero going separate ways, the Hero Group would start working on the export market, on which he feels distribution systems cannot be set-up overnight. "So I think Bajaj Auto will continue to have the edge there and continue to work on." The third concern Jain has is on higher input prices, an industry wide phenomenon, not restricted just to Bajaj Auto. "We have already seen some of the players take price hikes ranging from Rs 1,000 to Rs 2,500 and I suspect Bajaj Auto will also be able to recoup margins," Jain observed, adding, "They might work on some margin expansion because of a better product mix and therefore cover up that negative." He however sees some quotational loss further when the numbers are announced because the December sales were not up to par for Bajaj Auto. However, according to him, it is more of a short-term sentimental dampener. "The counter has already lost significantly on the ticker because of that. I see no point in trying to book your losses at this point. Stay with the stock, I expect a good recovery along with the market and even otherwise within the two-wheeler segment for Bajaj Auto and an easy Rs 1,400-1,500 over 2011 is possible," Jain adviced. On Tata Steel: The follow-on public offer (FPO) of the world's seventh largest steel maker opened for subscription today with the price band fixed between Rs 594-610 per share. Jain advices investors sitting on decent gains to buy as he sees further upsides despite some near-term pressure as the FPO has been priced at a 10% discount. "There will be the momentum sellers who will want to place some arbitrage there. But aside of that you look at the fundamentals, the UK - Europe business has certainly got a lot of upsides. We have seen that aside of sales resulting in balance sheet is strengthening. Going forward there are better price realization expectations and the blended price realization in the last quarter itself has been better because of the Europe business looking up." He sees Corus as one of the turning points for Tata Steel and expects positive surprises from the overseas acquisition going forward. At the domestic level, Tata Steel, a 100% captive iron ore company, he says would keep money within itself despite hardening iron ore prices. "About 50% of its coking coal requirements are sourced in-house, there is a input price push there so it will be impacted like rest of the industry but to the extent it has its own coking coal, it is protected. It has also started mining operations both for iron ore as well as coking coal and I see the positives of that flowing into this stock." He further said, "Over the next three years I see the margins growing in by, the gross EBITDA growing by close to 50% so on the top line and the bottom line there are positive expectations. The Chinese factor has been playing as a bit of a wet blanket but even then we are expecting higher price realizations because domestic demand subject to the infrastructure, real estate driver is still looking fairly safe. So on the down side if you are prepared for a 10% quotational loss I suggest you stay with the stock because the upside could easily be 30% to 40%." On IT biggies: Jain maintains that TCS, Infosys and HCL Tech, along with select other IT counters would be the next defensives. "We have seen TCS practically close the valuation gap with Infosys so now the question whether Infosys or TCS is a bit academic. I think going forward all the three players are indicating a robust top line growth with margin maintenance if not expansion. The rupee-dollar has been managed well. I think IT is the place to invest in at current levels. I will bet you can invest 10% to 15% of your target quantities now and then gradually build up your positions subject to how the market moves," he adviced. On HCC: With the likely outflow of money on account of the controversial Lavasa project, and with inordinate delays expected, Kanani told CNBC-TV18 that expects a strain on the company's cashflow. "The environment ministry has said that they will give a clearance on merit basis plus there would be penalty and some funds would be allocated for restoration of the environmental damage that has happened. But it is kind of positive than yesterday because yesterday the talks were that the project would not go ahead. Given the penalty would be paid, the project would go ahead. So there would be a kind of a relief for the company as such. But on the short-term to medium-term basis, there would be some strain on the cashflows of the company. Given that the penalty might be substantial as it is written in the order by the MoEF. So that needs to be seen. The amount of the penalty would be paid and plus the fund which would be kept aside. So that would put a strain on a cashflow for the company." On L&T: The market has not been too happy with L&T's numbers and the stock has hit an eight month low with multiple headwinds ahead. Concerns on deferment of some orders is set to make them miss their guidance. On the company's results, Kanani however said, it was above Angel's as well as consensus estimates. However, order inflow for the quarter has been a bit of a disappointment, he said. "The yearly target for the company was around 25% order inflow for the whole year, which seems to be steep now and we see a slippage despite the company maintaining its guidance because that would require a runrate of around Rs 37,000 crore of orders for Q4, which would be a massive jump as compared to the last Q4 of last year." But overall he is satisfied with L&T's performance in Q3 and recommends a buy with a target price of Rs 1,964. On his expectations on the company's margins going forward, Kanani said margins have peaked out. "What the margins were n Q3 should not be taken as a benchmark peak because it is kind of a quarter and Q4 has traditionally been very strong for the company. If you see the trend in Q4, company has reported margins in the range of 14-15%, so you will see an uptick in the margins in Q4. But the margins should be stabled. That is what I would agree because commodity prices have gone up plus L&T is around 30% of its order book which is fixed price contracts in which if there is a commodity hike, it takes a hit. So margins I would say would be remaining flat as going ahead," Kanani said. Jain said, L&T is a stock which is fairly overweight in most FII portfolios and hence in the event of any negative triggers further selling could be seen and hence rules out averaging on the stock. "But given the fact that Rs 1655 on the ticker for L&T is because of all the factors, the negative factors that I mentioned above, I wouldn't advice you to book your losses also at this point," Jain added. He thinks L&T would have a 20% upside in the year going forward on account of 3 or 4 reasons. "It has a very robust order book. There has been an execution pullback simply because of the political events that have happened in Delhi. I suspect most of them should be done with by the time we are into the budget session and we are in the last quarter of the fiscal year where typically there is an exigency to complete targets and utilize budgets. L&T would clearly be a gainer on that account. If you look at the order book accretion for L&T, there are no signals of panic yet. Even though the asking order book rate for next year does shoot up in view of the dwindling execution rate but this is something a company of L&T's size and might would be able to handle going forward. If L&T were to just increase execution by a minor 5% to 10% I think the flow through to the bottom line would be substantial and should we have a repeat of 2010 where we saw the first half of the year seeing the markets languish and then the second half of the year pick up very robustly then I think L&T would be once again a clear gainer. He further suggested, "Do not run to take your losses at this point. The Rs 1655 is an amalgamation of 70% macro factors, 30% stock factors. Stay with this stock and you will get a good exit. It is a good dividend paying company and should the demerger of businesses go through, you have a case in point in Reliance, look at the kind of value multiplier that event led to and L&T is a company of a similar size and reputation and category. So I think there are lots of upsides in staying with this stock."