Makes sense to buy IT now; Eicher oversold: Religare’s Siddharth Bhamre on his picks

“The talk of the US slipping into recession has been on for more than a year now, and a large part of that fear is already reflecting in the prices. At one point, investors were willing to pay 35 times (one-year forward earning), now they balk at paying anything over 20,” he said, pointing out that IT stocks have been underperforming since tumbling from their record highs in January 2022.

“And if you listen to the management commentary, you will note that the deferments are mostly for smaller, short-term projects, not the long-term ones which help (US) companies cut on costs. So yes, the situation is not as dire as most people would like to believe. You are never going to get attractive valuations and good earnings visibility at the same time. But if you are a value investor, it makes sense to start accumulating IT shares at these levels. It won’t be a smooth ride, there will be a lot of noise along way as the market reacts to the news flow from the US economy,” Bhamre said.

Religare’s top picks in the IT sector are HCL Tech, Infosys and TCS. It is cautious on Wipro.

Auto

In the auto sector, Maruti, Eicher Motors and Bajaj Auto are Bhamre’s preferred picks.

“I feel pessimism over Eicher Motors may have been overdone,” he says. The Eicher Motors stock has taken a beating over the last couple of weeks following the launch of superbikes by Hero Motor Corp and Bajaj Auto in partnership with Harley Davidson and Triumph, respectively.

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“There will be a dent in Eicher’s market share no doubt, but I don’t think it will be as significant as the market is expecting. The new players have yet to show that they can scale up quickly. Also, competition is nothing new to Eicher; when Java was launched three years ago many had said that (Royal) Enfield’s domination will be under threat. Things did not quite play out that way. Also, Harley’s and Triumph’s launches are not a bolt out of the blue; the market had priced it to some extent. That could explain why the stock has been struggling since peaking around Rs 3,850 in October last year. I am not saying that Harley and Triumph are not formidable competitors, but often the market gets ahead of itself.

"Lastly, Eicher is not a pure-play premium bike story; the commercial vehicle story also looks quite strong. Maybe the dynamics of the premium bike segment will change radically over the next five years, but that is still some way off,” he said.

As for Maruti, Bhamre is betting on the company gaining a respectable share in the SUV segment where it has launched new models recently. “For a long time, Maruti was about volume growth. That story is changing. Maruti’s earnings growth will now be driven by better margins as it sells more of its high models. The stock has underperformed for a long time, and despite the recent run up, valuations are not pricey,” he said.

Cement

Religare’s top bets in the cement sector are Ultratech, Dalmia Bharat, Ramco and Nuvoco Vistas.

“The valuations right now are not exactly cheap, but cement is a good long- term story,” Bhamre says. The two key triggers according to him — government spending on infrastructure and the boom in the real estate market.

“Till some months back, cement was a story about price hikes. That (price hikes) has stopped happening. But the pressure on margins is expected to ease going forward as raw material prices have cooled. There is a lot of capacity coming on stream right now, so cement prices may not go up much. But even so, cement is more a story about volume growth than price hike,” he says.

FMCG

Bhamre feels the recovery in the rural economy will be a major driver of FMCG stocks in the coming days. “The latest employment data shows that things are turning around in the rural markets,” he said.

According to Bhamre, FMCG stocks are not cheap at current levels in terms of absolute PE (price-to-earnings) multiples. “They (FMCG) have always been expensive, sometimes less so, sometimes more, there is no denying that. Having seen some of the stocks trade at multiples of 60 and 70 at one point, 50 may not look too bad.

"My point is that key FMCG stocks still look okay when compared to the historical 10-year average PE one-year forward. That’s not such a bad deal. Besides, when there is talk of a recession in the US which could hurt the Indian market as well, it makes sense to have defensive stocks in the portfolio,” Bhamre says. His picks in the FMCG space are HUL, Colgate and Marico.

“We are not so bullish on ITC, which at 35 plus times one year forward is above its historical average. It is a good story no doubt, but the risk-reward ratio does not look very appealing at this point,” he says.

Banks

“Banks are one of the safest stories right now. You just need to have them in your portfolio. You can’t go much wrong there. The retail loan book is not growing much, but given the strength of the corporate balance sheets, the risk of NPAs are the lowest in a very long time,” Bhamre says.

“Retail loan book still has plenty of scope for growth. Household debt is at manageable levels. And while incomes have not been rising fast, aspirations surely are. Also, the commodity cycle is down right now, but the companies will start borrowing to expand capacity for the next upcycle,” he says.