Ganeshram Jayaraman, Managing Director - Institutional Equities of Spark Capital Advisors.recommends some stocks which could see earnings compounding over 3-4 years, even if they look expensive on a 1-year price to earnings basis.
Spark Capital has come out with a list of midcap stocks that can be picked up with a 2020 target. City Union Bank, Berger Paints,Info Edge,Biocon, Federal Bank, Karur Vysya Bank, Cholamandalam Finance, Bata India, Blue Star, V-Guard, Gateway Distriparks, Timken India, Cyient, Intellect Design, Indian Terrain, VIP Industries and Sadbhav Engineering among others are part of the list.
Ganeshram Jayaraman, Managing Director - Institutional Equities of Spark Capital Advisors tells CNBC-TV18 the list has been worked out keeping in view the potential of these companies to compound earnings through value-creation over 3-4 years even if they look expensive on a 12-month horizon.
Below is the transcript of Ganeshram Jayaraman's interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.
Latha: You are a specialist in midcap stocks and we are seeing the midcap stocks beginning to outperform in a big way. Which is the sector that you are most cued on in terms of potential value in the midcap space?
A: The sectors we like are financials, consumption, more discretionary consumption specifically and automobiles pack. Also the companies, more subsectors within the infra pack which will benefit when government spend increases, it has been improving and increasing, we also see one more leg there which is the state government spend which has been a laggard for last 12 months, we see that improving in the coming years. So, clearly positioned towards a domestic demand recovery centric midcap portfolio.
We are kind of more wary on pharma, IT and a little bit of the staples pack as well.
Sonia: Let's start with some of the stocks you have identified for us - midcap stocks for 2020. Very interesting list here, you have a lot of consumption stories Berger Paints is something you are looking at, Kajaria Ceramics is something you are recommending as well. These are stocks that already have been hitting new highs, so you see more value in these names?
A: The thought process behind that 2020 note which we wrote is to buy two sets of stocks. One is, stocks which have been performing very well, demonstrated track record, where the managements have created some kind of edge, some advantage they have, which we believe will sustain till then. So, it makes these businesses more predictable, more consistent and those make it buy and hold view with the way we see things taking shape in terms of the demand recovery.
So, it is not meant to be seen with a value mindset, it is more like more earnings compounding story with a 3-5 year horizon where we see true potential of those businesses take shape. Lots of changes on demographics, lots of changes on how we see demand pattern take shape as we see in that phase. So, it is not necessarily stocks which are looking good with a 1 year price to earnings multiple but more structural businesses and the likes.
So, some of these stocks will look costly on a 12 months horizon but we are taking a 3-4 year view on these.
Latha: Can you tell us a little bit about Indian Terrain, it is not a stock we have discussed very often?
A: It is an apparel brand company Chennai based. It is demerged from the erstwhile Celebrity Fashions. It is kind of a niche brand and gaining popularity and that is a company that we see tremendous value actually in for a brand which has close to Rs 400 crore of sales trading at almost Rs 400 crore market cap . So, it is a micro-cap, it is not going to fit the criteria of many funds but that is a stock where we think there is good potential.
Sonia: So Page Industries is something that you like and the other story that you like is Blue Star. We are seeing that entire white goods space picking up quite a bit with Hitachi Home as well doing reasonably well over the last few months. Just take us through that theme?
A: Actually Blue Star has had a pretty strong transformation in the story. We saw how this company was five - six years back as more of a project engineering company and more cyclical and a lot of the margins and EBITDA came from that business. Today a transformation has happened in the form of a B2B becoming a B2C story and more AC lead where we are seeing the opportunity remaining more structural, its market share is doubled and whereas the stock price has gone nowhere in this five year - six year horizon. So, this transformation has happened in the business which we actually think from the cashflow standpoint from a structural more steady state, more working capital improvement in which has happened we don\\'t think the street is fully reckoning that business upside. Over a period of time we think this will pay off as we see.
Sonia: I also noticed that you have a lot of financials in your midcap stock list. You like Federal Bank, you like Karur Vysya Bank, some of these banks have been through a rough patch over the last 4 or 5 months. You still believe that they are good to go for the long term?
A: There are 3-4 things which are improving. One is government spend, a lot of the NPA challenges which these banks faced were also result of over the last 2-3 years delayed cash flows and the whole debtor paying creditors cycle getting elongated which we see improving with government spend picking up, with more activity levels, with more consumption picking up, those will start reflecting.
Also we see rural having bottomed out and kind of improving. So, over the next 12-18 months we will see cyclically challenged NPA cycle beginning to improve. We need to draw distinction between structurally challenged NPAs which where we know are larger names there but more cyclical nature is where the exposure for these banks are more in. We see that improvement still not there, we see it coming and that makes these stocks very good value actually. Some of them trade just about at book value or marginal premium to book value which makes them actually compelling.