Focus on domestic stories; eye stocks which will gain from GST; like ITC: Macquarie

Earnings could face some pressure in the fourth quarter, but in 18-24 months, it will see much stronger earnings growth.

Bhatia has a portfolio strategy that is focused on India. He recommends looking at beneficiaries from GST implementation. One large-cap stock, according to him, is ITC. “Every year we see increase in cigarette taxes…stable tax regime will benefit it,” he told the channel. In the midcap space, he prefers Glenmark Pharmaceuticals as he likes their business.

In the consumption space, home improvement will be a very long-term story and it will play out in India. He bets on Crompton Greaves Consumer Electrical, Asian Paints and Voltas with a caveat on slightly higher valuations.

“Newspapers today are screaming about the heat wave. That is why air conditioners (ACs) and fan companies are seeing an uptick,” he added.

Furthermore, Bhatia sees GST to be a positive trigger for these firms.

Among metals, Vedanta has attracted his attention. “We have liked Vedanta and pushed it for six months…the stock has done very well,” he told the channel.

On housing and home improvement, he believes that the process of building cheap homes must be bigger in the country. Building cheaper homes is yet to happen on a state and country-wide basis, he believes. One can look at cement and other such established stories here, Bhatia said.

Reacting to the Supreme Court’s order to ban BS-III vehicles from April 1, he believes that the developments would be short term pain for companies. In fact, this sets the base for a stronger growth and next two years could see earnings upgrades not downgrades, he said. He prefers Maruti Suzuki and Tata Motors in the space.

Below is the verbatim transcript of the interview.

Anuj: All times high now for the market but in a sense the market has been flat for two year period. From here on, do you think the risk reward is in favour of equity investors?

A: Yes, I would think there was definitely a positive risk reward in favour of investors. Anyway it is something which you have to be very measured, it is not one-way street in that way but the Q4 results will probably be the worst quarter; there could be some stress in bank results, on autos also there could be some charges because of the BS-III transition. So, all told the next 18-24 months would definitely be much stronger earnings growth. I would expect earnings growth to be revised up rather than down which is what we are seeing for the last couple of years.

Latha: Yes, valuations are a bit heady but where would you be on the front foot, which sectors?

A: The portfolio strategy has to be focused within India, so domestic stories are best. There are significant headwinds coming from export stories, for combination of political uncertainty coming through and also because of specific issues, regulatory issues with some sectors like pharma may face. I would therefore focus primarily on consumption. I think passage of goods and services tax (GST) is also one big trigger. One stock that clearly benefits, one largecap name which benefits from the passage of GST which results in stable tax architecture is ITC.

We know for a long time that we see year-on-year increase in cigarette tax and that can be moderated going forward. That is one business that will definitely benefit from stable tax regime. So, ITC is clearly one GST pick which most people don’t think like that; they look at logistics companies or some other consumer companies but ITC is one big beneficiary from stable tax architecture. So, that is one business that we can look at.

In the midcap space, in the pharma we actually like Glenmark Pharma. We have been pushing that for a long time and I saw Glenn Saldanha on your channel, so he is best spokesman for his businesses and this is one business that we have also like. So, I think we are now in a strategy where we have to pick and choose the arrows that we use because it is not that the target is in front of us just 5 feet away and we can hit the bull’s eye. It will require a more measured calibrated approach.

Sonia: You were talking about consumptions, anything in this space that interests you? I know valuations might be a bit expensive here but anything that you like?

A: I think home improvement is a very long-term story that is going to play out in India. I think stories there are Crompton Greaves Electricals, Asian Paints and Voltas. These are some of the names which are very interesting. Of course there is always a caveat which you yourself highlighted on valuations, but if you read the newspapers and I think one of the reasons why all these stocks are up today because all the headlines are screaming about heat wave in the interior of India. So, temperatures are soaring and which is why most of these AC and fan companies are seeing uptick in prices.

However, also again GST will play a very good positive trigger for most of these businesses because there is a presence of unorganised sector and there is that portion of tax evasion in most of these electrical companies, companies which produce electrical products and therefore they are also added beneficiaries of GST. As I have also said throughout this entire process that stable tax architecture and reward to honest taxpaying companies is what this entire GST and demonetisation exercises is signalling and once that is in place from July 1st onwards, we would definitely see. So these are long-term plays, all these three stocks that I have named.

Anuj: Looking at your top picks LIC Housing Finance is there and we also have Mahindra & Mahindra Financial Services, so you are bullish on entire gamut of non banking financial companies (NBFCs) or is this stock specific call that you are taking?

A: I think NBFCs are cheaper than the large bigger counterparts in their respective space, so that is why we like them. I think a one way uptrend in any sector is now not its trend which I would look at even in banks. We are more calibrated looking at private sector banks rather than public sector banks. So, these two names we like essentially because they are cheaper than the largecap counterparts in the same sector.

Latha: Will you touch any of the utilities, metals. The government is trying its best to retrieve non-performing assets (NPAs) as well but separately there is a metal rally going on globally?

A: Yes, we have a metal rally going on for some time, we have liked Vedanta and that is something which we have pushed for the last six months and that has done very well. The only thing I will say is that the metal rally is contingent upon what happens in China and I am no expert on China but the view is that China will have stable outlook at least for most of this year until their political party Congress gets done by November this year. So, clearly metals and Vedanta is what we would play but the real story for India is the fact that the domestic consumption plays would be much stronger. So, I would focus my energies on that part of the market.

Latha: The housing finance is seen by this government as this major key to raving up the economy. Is there anything else you will play in that, any real estate stock, home improvements any of the other stocks – housing theme?

A: Home improvement - Asian Paints clearly plays into that entire story. The process of building cheap homes is something which India has to do. Unfortunately, I have not seen that happening for a long period of time for any 5-10 year period. I still think that we are grappling with the way to do it on a large scale basis in this country. If we can do it and this government can start pushing that, I hear multiple stories that this has now started happening that villagers are getting subsidised loans at very favourable terms both in terms of tenure and in terms of the interest rates.

I still have to see that happening on a country wide basis or even on a state wise basis in some region of this country. So, if we get to that then there would be plays, but right now I might as well focus my energies on established stories so maybe you can look at the cement side, but to look at some other specific real estate plays I would not be part of that. I would think Asian Paints, Voltas or cement is a better way to play right now.

Sonia: We have a pick up that we are seeing in some of these auto names that were impacted yesterday because of the BS-III ban so names like Hero Motocorp there is some buying on dips seen. What would your view be on this space as a whole? What kind of growth opportunities do you see and what are you favourites?

A: We like Maruti Suzuki and we like Tata Motors. Both of them are coincidentally not as impacted as some other businesses because of the BS-III transition. I would think that even for businesses that are impacted it is something which they will be able to manage. At the most it basically creates a low base for the last quarter of this year and anyway I expect the next two years will be earnings upgrades rather than downgrades which we have seen for some time now. So, I would ignore some of the bad news which comes from the two-wheeler stocks in the fourth quarter. It is something which is one-off and it is industry wide issue and nothing related to demand and it sets the base for a stronger growth for next year. Our top picks I would reiterate are Tata Motors and Maruti.