I think most pharma stocks are overvalued now, and the rally will stablise now, says Sumit Bilgaiyan, the founder of Equity99.
"Technology stocks have always been in vogue, as they have generated returns consistently, and have less cyclicality. Also, in bear markets and stress times, investors prefer parking their funds with large tech companies as a defensive bet," Sumit Bilgaiyan, the founder of Equity99, said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: The market gradually picked up momentum in the last one month and majority of experts feel liquidity was the only reason behind it along with hope that growth will be back sooner than later. Do you agree, why? Do you expect the rally to continue in coming month too as the next phase is expected to start?
A: I feel liquidity is a reason. Along with that, the entry of numerous retail investors is also a major reason behind this rally. In the lockdown period, 21 lakh new depository accounts were opened.
Surprisingly, retail investors are a major part of this rally. I expect the rally to continue provided a) Q1FY21 results are not worse-than-expected b) month-on-month improvement is seen in the performance.
Q: On the one side, the majority of experts say investors should stick to quality large caps, but on the other side, broader markets (midcap and smallcap) continued to outperform benchmark indices in the last one month. What is you advise to investors and does the rally in midcap/smallcaps indicate that we are on recovery path now?
A: It is too early to comment whether we are on a recovery path, as we should wait for Q1FY21 and Q2FY21 results to decide on that. Yes, I believe investors should not stick to only large caps, but they should also buy quality midcap stocks which are at reasonable valuations. They should focus on keeping their risks low. Albeit, large caps should be the major part of the portfolio undoubtedly.
Q: Reports suggested that the government and RBI may come out with another fiscal package to boost the economy. What is your take on it and do you feel so?
A: My take is that it is extremely tough for a big fiscal package, as the government has to take care of their financial position too. If they go overboard, they will face consequences later. The government will definitely come out with smaller stimulus packages in order to help the grappled sectors, but if you are expecting something big, I think you are gearing yourself for disappointment.
Q: In the last six months, all sectors are still in the red with most of them showing double digit decline. Pharma is the one sector which already recovered all losses, rising 23 percent in 1HCY20 and over 60 percent from March lows. Do you think the rally will continue in pharma stocks, why and what are your top bets?
A: I think most pharma stocks are overvalued now, and the rally will stabilise now. Markets become positive too soon, before you can think. I believe pharma stocks which have a great future potential along with a robust business model should be bought even now. My picks are Sun Pharma and Dr Lal PathLabs.
Sun Pharma: It is the largest pharma company of India, and one the largest in the world. It is available at a reasonable valuation currently.
Q: Technology sector traded almost in line with benchmark indices, rising 35 percent from March lows while declined only 2 percent in 1HCY20 against double digit fall in benchmark indices. So what is driving the rally in technology, is it just attractive valuations or liquidity or is it going to be one of leaders in next bull run?
A: Technology stocks have always been in vogue, as they have generated returns consistently, and have less cyclicality. Also, in bear markets and stress times, investors prefer parking their funds with large tech companies as a defensive bet. Investing in companies like TCS and Infosys, is like investing in dollars with better returns. I think it will continue to generate greater returns in future.
Q: IPO or primary market has been the most affected segment as there was only 1 IPO in the Main Board segment and around 8 in the SME segment in 1HCY20 against 7 and 21 respectively in 1HCY19. Do you think COVID-19 is the only reason for weakness in the IPO market and what are your expectations about 2HCY20?
A: Yes, I think the bear markets triggered by COVID-19 are the major reason for disruption in IPO and primary markets. I think the scenario in 2HCY20 should be better than earlier, but the valuation will definitely take some beating, so if the companies are comfortable with lower valuations, deals should go through.
Q: Lot of companies announced the share buyback issue in 1HCY20. What is the general reason behind share buyback and do you expect more share buyback issues in 2HCY20 also?
A: The main reason for share buyback is clear that the company can buy the shares at a much lower value than normally, so they prefer reducing the public stake. Companies with a lot of extra cash have mainly 2 options with them - dividend or buyback.
Q: What are your top three picks for investors?
A: Srikalahasthi Pipes: SPL is one of the leading players in the DI pipe industry. SPL has an equity capital of Rs 46.70 crore supported by reserves of Rs 1,369.45 crore. It has a share book value of Rs 303.25 with a price to book value ratio is just 0.63 which is highly attractive.
During FY20, its operating profit has grown at 39 percent to Rs 260.2 crore and PAT has grown at 60 percent to Rs 187.68 crore. At the CMP of Rs 190, the stock trades at a P/E of just 4.75x. Stock is available with a 70 percent dividend. We are recommending a strong buy for medium to long term.
Gujarat Sidhee Cement: It is a Mehta group’s flagship company. It markets cement under the brand name 'Sidhee'. Company has posted turnaround numbers for FY20. During FY20, it has reported operating profit of Rs 77.37 crore against loss of Rs 11.11 crore in FY19. It has reported PAT of Rs 44.84 crore against loss of Rs 5.87 crore. Company has paid a 10 percent interim dividend for FY20 after 7 years. At the CMP of Rs 31.85, the stock trades at a P/E of just 6.2x. We are recommending a strong buy for medium to long term.
Dr Lal PathLabs: It is one of the largest chain of path labs in India. Consolidation in path labs will strengthen giving more power to such players. Company has pricing power but it is growing mainly on the back of volumes.
During FY20, its operating profit has grown at 17 percent and PAT has grown at 13.40 percent. Dr Lal has an equity capital of just Rs 83.3 crore supported by reserves of Rs 949.5 crore. Mutual Funds hold 7.63 percent and FPIs hold 20.01 percent stake in the company. We are recommending a strong buy for medium to long term.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.