Bullish on BHEL, L&T: Anand Rathi

According to Amol Rao, Anand Rathi liquidity is now chasing beaten down capital goods stocks. He thinks Bharat Heavy Electricals Ltd (BHEL) is one stock where the company is fairly insular in terms of demand and orders it can receive.

He is not very sure about green shoots for the sector but feels pent up demand will be cleared soon. However, he does not see this demand being sustainable over two-three years. BHEL and L&T remain top picks at Anand Rathi, says Rao. "We are positive on these because of the size and scale and their contribution to gross fixed capital formation of India," says Rao. Also read: Rural economy flavour of season; check out stocks to bet on Below is the verbatim transcript of his interview on CNBC-TV18 Q: What do you make of the fact that we have seen some strength come back to stocks like Bharat Heavy Electricals (BHEL), L&T etc over the course of the last couple of trading days? A: Apart from the fact that the valuations are factoring in too pessimistic a scenario at the moment, I think there has also been a slush of liquidity in the market. Liquidity has chased a sector, which has been beaten down and where valuations were a little too pessimistic to handle. So that is the reason why we are seeing these stocks fly of the handle in the recent past. Q: What about BHEL, up 9 percent in two days now, how would you approach that one? A: We have always believed that BHEL has got the short end of the stick and there has been too pessimistic a view taken on the stock. One has to understand that this company though it has been receiving orders much lower than what it has in the past, they are still receiving a sizeable chunk of whatever orders have been released in the country in the power generation space today. A lot has been made about competition that it is facing especially in the higher megawatts. Howeve, we think this competition is not really very serious with the exception of two other players. So going forward I think for the next two years the company is fairly insular in term of demand and in terms of orders it can receive. Q: Are you tracking what is happening with some of these MNCs ABB today, Siemens yesterday, some of these stocks gaining about 10-15 percent? A: Difficult to catch a handle on what is happening in the MNC stocks but with regard to the domestic stocks I think the valuations were quite beaten down for a company like BHEL and L&T also had quite a bit of upside. For a company like Siemens which has done fairly well in the last two days, people are quite positive about the recovery in the margins though I wouldn’t extrapolate the same with the performance for the whole of next year. Q: Do you see a change in the fundamentals for these stocks for instance there has been this debate on whether the economy is finally showing signs of green shoots, and whether we are possibly at the point that we could see a revival in the investment cycle - do you think that could be contributing a bit to the more positive outlook on these stocks? A: Yes, I do think so for the simple reason that a lot of projects and a lot of infrastructure creation that was mothballed during the last two years is finally coming to the fore. While I wouldn’t say these are green shoots, I would definitely say that some of our pent up demand is now in the process of being cleared. This has steadily happened over the next two-three quarters, election code of conduct not withstanding because some of them would be at the state level. Having said that, this is definitely not to be construed as a sign of sustainable demand creation over the next two-three years but I think it is a heartening sign that things are finally moving on the ground. Also if the bureaucracy and the government takes a positive shape then this could be construed as a momentum to be sustained over the next plan. Q: How would you trade a stock like Crompton Greaves, that is also back on the radar of a lot of investors? A: We do not have coverage on the stock and it operates in several different markets, all of which are under pressure right now. so wouldn’t like to make an official comment on the stock. However, our top picks in the sector remain Bharat Heavy Electricals Ltd (BHEL) and Larsen and Toubro (L&T) right now. And we are positive on these because of the size and scale and their contribution to gross fixed capital formation of India.