In an interview to CNBC-TV18 Prakash Diwan, Dir, Altamount Capital Management picks top sector plays for 2014. He is particularly upbeat on the cement and logistics space on back of new age growth in the infrastructure theme.
On the logistics side he would look at companies like Gati, Redington.
From the private banking sector ICICI Bank is his best pick in terms of valuation compared to Axis Bank. Smaller banks like Federal Bank, Oriental Bank of Commerce, Lakshmi Vilas Bank, these are ideal M&A candidates, he says.
While selecting stocks from pharma space one should have a bottom-up and not top-down approach says Diwan.
He is bullish on some of the basic exporters from the agriculture side and would look at companies like KRBL, Agro Tech Foods. From an export engineering perspective its auto ancillaries he is bullish on Bharat Forge, Rico Auto, Minda Industries.
"I am extremely bullish on power as a sector," says Diwan and believes PTC India is a multibagger in the making within that space.
From earnings perspective, he would look at Reliance Industries.
Also read: Who is betting on what? 10 brokerages’ best stock picks for 2014.
Below is the verbatim transcript of his interview on CNBC-TV18.
Q: In 2014 which will be your top sector picks, which sectors you think will do well in 2014?
A: Very clearly we should see a come back for infrastructure side given the fact that the last few years have been predominantly consumption led for the markets and most of the triggers come from the consumption theme. The infrastructure theme which has been lying dormant should probably start seeing some sort of interest given the fact that we would have a new government and the government would need to work on something which is as basic as this.
Within infrastructure, I believe cement is a sector to watch out for, that could probably surprise all of us. Logistics and transportation would be the other one followed by utilities which would include power, roads, transportation etc. But my best bet would be on the cement side followed by little bit of logistics development that I see as the new age growth in the infrastructure theme.
Q: What do you like within the cement space and logistics, something like Allcargo Global that would interest you?
A: From the cement space, in terms of the supply side all of us very clearly know where we stand, not much of supply side has been added. The demand has also been fairly flaccid. However, what could change is a little bit of incremental demand from pockets which have either not been contributing, and you have only the regular housing and civil construction related to government spending that has been coming in for consumption. If that could change incrementally even to the tune of 15 percent then the pricing power that most cement companies have today could dramatically change in margins.
The margin profile for some of the larger players which have consolidated like Ultratech Cement, ACC, some of the smaller ones like India Cements could dramatically change and that is where the good story is in the making. It could not take too long; possibly another two quarters and you could start seeing the rumblings of change in the ratings.
On the logistics side, my sense is you could probably look at companies that are into insulation like Gati, Redington which is a master in that business. I am looking at it more from the micro development on the logistics side, as well as the larger one which is infrastructure related would be ports.
I am a big believer in the fact that ports will do well if the country wants to go to the export way. We have seen Adani Ports operationally do extremely well apart from the Modi factor. Gujarat Pipavav is the next company that stands out as I had mentioned earlier. I believe it is one of the best companies in the making in that particular sector.
Q: What about Larsen and Toubro (L&T), where does that figure in the infrastructure space?
A: L&T has got the benefits of the peripheral growth in infrastructure from most of the verticals, sub verticals. And it does chew into all these profitable businesses in a significant way. However, in terms of price action I don't expect L&T to be a multibagger from the Rs 1000-1100 range whereas some of the other companies which are undervalued or under owned could surprise us from an investment perspective.
Q: What about banks, Axis Bank and ICICI bank are two stocks which have been recommended for 2014 by brokerages, what would be your outlook for banking space and what would be your top picks either PSU banks or private banks?
A: I would still go with the large banks particularly because given the fact that we are not only getting into a cleansing mode on the non-performing loans (NPLs), we are also looking at dramatically new areas of growth for some of these smart agile banks.
ICICI Bank stands as one of the best picks there in terms of valuations. Axis Bank I believe is a little bit stretched and there is little bit of hype around there. And given the fact that we are also getting into an M&A environment of sorts for foreign banks to look at Indian participation, some of the well run smaller banks in the private space would benefit. Federal Bank, Oriental Bank of Commerce, Lakshmi Vilas Bank, these are ideal M&A candidates and I would definitely look at those as well.
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Q: Would you see any incremental upside from the likes of IT and pharma that have done well in 2013?
A: I think the appetite will continue particularly pharma. It is a huge space, we have probably seen just about 25-30 percent participation in terms of the stocks. In terms of listed stocks pharma happens to be one of the well represented sectors. I would believe there will be more specialised focus activity which will continue to be center stage so you will have more activity related to M&A and consolidation. So there will be probably a lot of FDI news not necessarily money flow from the portfolio side in pharma companies anymore. And you got to be very specific in bottom-up and not top-down in pharma.
On IT, I would still believe we still have very good times coming in with the US markets shaping up the way it is. So it is going to be a very good contra bet or defensive bet irrespective of where the rupee is headed. A lot of people read too much into the rupee weakness in buying into IT but my sense is operationally IT has come of age and you could look at it more from a margin expansion and a top line growth itself.
Q: What are the stocks that you would play for in the broader markets?
A: The export oriented areas has been textile. We have seen the likes of Arvind particularly do extremely well. I am quite bullish on some of the basic exporters in our country and that is from the agriculture side. There are some very small companies in that space, which usually don’t draw institutional interest but I would still believe a KRBL, Agro Tech Foods, these are companies which given their export orientation also benefit.
From an export engineering perspective its auto ancillaries that will again be center stage. I would be extremely bullish on the likes of Bharat Forge, Rico Auto, some of the companies that are yet to hit the big time. They are extremely well-run companies.
Even Minda for instance; it is a specialised company which does only one product but has almost like 65 percent market share with OEMs overseas. We have seen the Motherson Sumi story unfold, Sona Koyo is a classic turnaround case. So that is where I would look at from an export orientation.
Q: What about power, it is in focus today, what would be your call for 2014?
A: The CAG audit shouldn’t probably be something very significant and I don't expect it to set the cat amongst the pigeons in a significant way. Particularly, if the likes of Tata Power and all are going to get audited I am not too sure if there is going to be something untoward that should appear.
However, I am extremely bullish on power as a sector. But I would like to focus on a company called Power Trading Corporation, which is in a very specialised area work to such an extent that there is nobody else replicating that particular activity within India. Once it reaches a little bit of scale because as compared to global peers it is way down at this point in time because the sector has not taken off. But as and when those pockets of production start rumbling up, power trading will also start getting into some sort of a play. PTC India is undervalued given its huge potential and is a multibagger in the making within the power space. It is a large cap play, good institutional interest, enough liquidity; I think that is the stock I would watch out for.
Q: We will be entering earning season soon so what would be your top earnings pick for 2014?
A: I would look at Reliance Industries to once again come up with a decent set of numbers which is not great news. The change in Reliance Industries revenue profile given the fact that we are getting into 2014, which has always been touted as a year of change as far as E&P is concerned could be a big surprise. So I would look at that in the early part of January to get the flavour of the earning season.
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