Consumption to rock, capital goods may not: Prabhudas Lilladher

He is positive on Infosys and continues to hold it. In midcap stocks, he is positive on Hexaware Technologies.

Below is the verbatim transcript of R Sreesankar’s interview to Latha Venkatesh & Sonia Shenoy.

Latha: First up, monsoon cues. We have all heard a bunch of brokerages going gung ho on the rural stocks and Mahindra and Mahindra (M&M) continues to be still a decent outperformer. Have we done enough of rural stock picking up? Should we be in for moving away from the stocks now because of the way the monsoon is panning out?

 A: My thought is the monsoon was only a catalyst, probably for the expansion of price-earnings ratio (P/E) multiples for many of these rural consumer focused stocks. Let me put it up that way. So, from now on, it is clearly consumption, consumption and consumption - that is what the mantra looks like at least for the near term because if you go back 12 months, everybody was bullish on capital goods, expectations of large investments coming in. With the capacity utilisation of the industries in FY16 being lower than in FY15, invariably, that capital goods theme has not played out well. However, with global economy remaining subdued or growth remaining subdued, probably you will continue to see the global commodity prices remaining subdued for the near term also. So, I do not expect to see large amount of investments to happen.

So, capital goods as a segment may not do pretty well. And if you see the underperformance of many of these capital goods companies which is invariably there, the sector itself has underperformed. When the liquidity is continuing to come, where will it go? It will continue to go into the consumption stories. If I take three-five year view, I do not think that any one of these consumer staple companies will actually see degrowth. Now, there may be cannibalisation which may happen. Probably Patanjali’s products may come in somebody else’s product, but as a segment, that entire segment is expected to grow wholly.

You will also see a similar action in banks. If the pain is out of the bank, incrementally if the underwriting a lot of these banks have done, even the private sector banks, so in the last five years etc, how much has become bad? If the answer is no, then if you take care of your existing non-performing assets (NPA) and the increased requirement of provisioning due to ageing, once that is over, you will start to see the growth there also, much better. So, you are going to see a level of interest continuing to be there in the rural, consumption focused. I do not want to merely say rural, let me say it as consumption focused themes as well as in the financial services for the near-term and for the next three years plus.

Sonia: Ashok Leyland is down quite a bit after the merger with Hinduja Foundries, it did not go down too well with investors. What would your advice be to long-term investors in the stock?

A: The news of a merger with Hinduja Foundries, I do not think will go very well with investors because Hinduja Foundries is a loss making company, its problems are not solved. How the merger is going to solve the problems? Going forward, will it be again continuing to incur losses? All these questions need to get answered. I do not think one conference call will ease away all the doubts which linger in the mind of the investors and analysts that everything is hunky-dory. Money was a problem. Once the infusion of funds comes in, will it solve the problem? I do not think so. So, for the near-term that looks a little dicey.Sonia: There was a bit of a recovery there post the commentary that came in from the Infosys management, but would you look to buy it at this price of Rs 1,040?

A: Yes, we do and we have a target price of Rs 1,400 on the stock. So, it remains one of our top picks and we like the stock and though it had a bit of an issue in the first quarter performance. Yes, we like the stock.

Latha: Your take on any of the midcap IT stocks, have those stocks all fallen enough or are you avoiding the sector?

A: Not at all. In the midcap IT space, we still have a couple of stocks in our radar. We like it. We like Hexaware Technologies, we like NIIT Technologies, these are part of our top picks and we continue to like these stocks.

Latha: Bajaj Auto has done a fabulous job of their finance wing, Bajaj Finance. Would you watch very closely at the moves from Hero Motocorp. If it were listed, would that be a big stock that you would look at? And basically, non-banking finance companies (NBFC) where would you stand?

A: When you say NBFC or banks or private sector banks, public sector banks and old generation private sector banks, it encapsulates everything out there and microfinance companies. So, if you look at this space and if we believe that India is going to grow on a strong wicket over the next ten years. I see no reason why that should not grow. That should be the first segment which should continue to see the strong growth. As consumption increases, life pattern changes etc, the banking also will become more into a play. That is number one.

Number two, digitisation in banking segment will also change the way we function on its head. So, that is the second part. Third is obviously, in this game, there is a huge canvas which is out there where everybody has got a role to play. Now, the private sector banks - let us look at the way the growth has been; the new generation private sector banks, all of them have been growing at 20 percent plus, even in the first quarter. State Bank of India has grown their assets again by around almost 10-12 percent. The industry has grown at around 9-10 percent. The other public sector banks, some have degrown, some have grown by around 1-2 percent. Look at NBFCs; they have also shown a year-on-year growth. So, my estimate is over a period of time public sector banks will actually see a contraction or rather in their market share where NBFCs, banks and everybody will be actually starting to take away market share from here.

So, the market is clearly there and for some of the regional players where they are very strong, they will even have a better role to play. So, I am not worried about that particular segment. Only worry is sometimes when we expect these valuations are stretched, we keep seeing the stocks go up even further. So bringing doubts in our mind to what extent these valuations can go.

Latha: I wanted to ask you about one set of stocks that are always in the limelight, the auto ancillary space. What is your pick of that pack?

A: The auto space is expected to do well. So, in general, you will see all the auto ancillaries also doing reasonably well. So, I do not think it is going to be a negative in terms of that space. The only thing is that many of these stocks valuations have been running ahead and that is the only concern that I have. Otherwise, we used to have Maruti Suzuki in our top picks; because of the price run up we removed it from the top picks. We used to have Tata Motors in the top picks. We still like these companies from a fundamental perspective. But the price points are extremely high, higher than our target prices, etc. and that is the reason why we do not have it in our top pick.

However, with a continued optimism a] in consumption b] in agriculture related income, etc. you expect to see a good performance for the autos, original equipment manufacturers (OEMs) and consequently for auto ancillaries as well.

Sonia: I just wanted to ask you about your buy on SpiceJet. You like that stock in the aviation space. What kind of an upside do you see there?

A: We still have a buy on SpiceJet and we see a good upside, in fact if I can remember correctly, the target price that we have is around Rs 115. The fundamental reason for recommending the stock still remains the same - 1) the growth in passenger traffic is increasing 2) the load factor of SpiceJet continues to be pretty high 3) the financial problems which they had, to a great extent are behind them. You do not see that particular problem. We are not anticipating a problem of that to happen and 4) we do not expect this 20 percent kind of a growth in passenger load factor or passenger addition to continue to happen.