The underlying situation in India is not so encouraging and the improvement in the economic scenario has been a bumpy road but still stock markets have recovered much before than expected.
While making investment decision in the present climate, look for growth companies with reasonable valuations, strong balance sheet (no/low debt and healthy working capital situation), extremely capable management and consistently good return ratios (which will help in generating free cash flows), Sumit Bilgaiyan, Founder of Equity99 tells Moneycontrol's Sunil Shankar Matkar in an interview. Edited excerpts:
Q: With a strong recovery from March lows, some experts say we are in a bull phase. Do you agree and why?
I believe this rally is definitely driven by liquidity but also surge in delivery volumes from retail investors has given a significant push to the recovery. The underlying situation is improving at a snail’s pace but the markets have come back much faster. I feel it is too early to call it a bull phase, we will have to wait for at least two-three months to see where the market stabilises, when retail investor volumes normalise.
Q: Benchmark indices and broader markets seem to be going hand-in-hand in the rally we have been seeing for a month now. What is the market pricing in when everyone is saying that the first half of FY21 is going to be bad in terms earnings and growth while coronavirus cases continue to rise?
As I said the underlying situation in India is not so encouraging and improvement in the economic scenario has been a bumpy road, still stock markets have recovered much before than expected. Clearly, I believe that markets are pricing in the following aspects: a) The scenario in India with respect to recovery will continuously be improving month-on-month, b) there will not be any more countrywide lockdowns and c) FY22 performance will be similar to FY20 performance and it will not be impacted by the COVID-19 pandemic.
Q: Reliance Industries holds its AGM on July 15 and as per its last AGM plan, the company successfully completed its debt-reduction target well in advance. What are the key things and announcements to look out for? What should investors do?
Reliance Industries (RIL) has done a commendable task of closing a host of deals and getting the company net debt-free much before the timeline, which has clearly got a lot of positivity about the company. Key aspects one should look out for in the AGM are: a) expected revival in the petro-chemicals business, b) oil-to-chemicals capital expenditure target, c) details and update about the ARAMCO deal and d) outlook on JioMart. I believe investors should add the stock to their portfolio given a) RIL has become the biggest conglomerate of India with a broad range of business, b) main value of the company comes from telecom and retail business (not a pure petrochemical company anymore), c) telecom business will continue to do well, the petchem segment is on improving trajectory (while retail business might take time to come back to normalcy), d) JioMart can be the next trigger for the stock, e) the company has become net debt-free which makes the business more robust.
Q: Rossari Biotech is launching its IPO and Gland Pharma has filed IPO papers with Sebi. Do you think more IPOs will come and which companies will be brave enough to do so in the present economic climate?
Yes, I believe more companies which are looking for IPO will be encouraged to launch the deal during the rest of the year, given the sharp recovery in indices and also the broader markets. The performance of markets in the coming months will also be a big factor in their decision about the valuation, though companies will not have to take a big haircut on valuation as anticipated during March-April 2020. The sectors which are in vogue and investors are bullish about are pharma, FMCG, chemicals, IT and essential services, so I believe the upcoming IPOs will be from these sectors.
Q: The recovery of benchmark indices, broader markets and a majority of sectors from March lows seems to be so strong that around 100 companies have touched a record high during the lockdown period. These include Reliance Industries, TCS, Adani Green Energy, Alembic Pharmaceuticals, Astrazeneca Pharma, Biocon, Britannia, Ruchi Soya Industries and Vaibhav Global. What are your thoughts? Should investors buy these stocks and if they have them, should they hold?
As we have seen, the stocks that have run up and are trading at 52-week highs are mainly from pharma, FMCG, chemicals and IT sectors. Investors have been bullish on them as these companies have shown resilience to fight back from the economic weakness due to the COVID pandemic. My advice is that if investors have these stocks, they should hold them (avoid selling the winner stocks in your portfolio), and if they do not have them, they should plan to buy these stocks in a staggered manner (divide your purchase over three-four weeks), which will help to average the cost and investor won't regret if markets correct.
The majority of the stocks are high-quality companies. I would have a cautious view on Ruchi Soya Industries and would advise investors to stay away from it till the free-float market capitalisation improves (promoters have 99.03 percent shareholding with 99.84 percent of it being pledged).
Q: Given the rally across equity segments and challenges going ahead, where will you invest your incremental money?
I would invest 60-70 percent of my incremental capital in largecaps and 30-40 percent of towards high-quality midcaps, which can weather the storm of COVID-19 pandemic. I would look out for growth companies with reasonable valuations, strong balance sheet (no/low debt and healthy working capital situation), extremely capable management and consistently good return ratios (which will help in generating free cash flows).
The company is engaged in the operations of Container Freight Station (CFS) and Inland Container Depot (ICD). The CFS operations of the company are conducted through three yards, out of which two are situated at Ajivali and other at Somathane in Panvel (Raigad, Maharashtra) with the aggregate installed capacity of over 5,35,000 TEUs per annum. NCL has an equity capital of Rs 150.52 crore supported by reserves of Rs 1,648.73 crore. It has a share book value of Rs 119.54 with a price to book value ratio is just 0.24, which is highly attractive. Ace investor Mukul Agarwal holds 1.59 percent and Kushal Jayesh Khandwala holds 1.08 percent stake in this company. At the CMP of Rs 29, the stock trades at a P/E of just 9.65x. We are recommending a strong buy for medium to long term.
Thermax, a leading energy and environment solutions provider, is one of the few companies in the world that offers integrated innovative solutions in heating, cooling, power, water and waste management, air pollution control and chemicals. Thermax has manufacturing facilities in India, Europe and Southeast Asia. During FY20, it reported an operating profit of Rs 405.98 crore and reported PAT of Rs 212.25 crore. The company has paid a 350 percent interim dividend for FY20. Mutual funds hold 15.73 percent and FPIs hold 7.77 percent stake in this company. We are recommending a strong buy for medium to long term.
KPIT is a global technology company with software solutions. During FY20, its operating profit has grown at 216 percent to Rs 289.67 crore and PAT has grown at 170.51 percent to Rs 146.59 crore. Mutual funds hold 10.03 percent and FPIs hold 23.30 percent stake in this company. We are recommending a strong buy for medium to long term.
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