Like auto, buy PSU banks, check out IT: Motilal Oswal AMC

The Commercial Vehichle (CV) cycle is picking up and a lot of companies will see a rise in their operating profitability in the coming days. In particular, the auto ancillary space is a good bet due to strong earnings growth, says Taher Badshah of Motilal Oswal AMC."Auto ancillaries is riding on the back of some of the large original equipment manufacturers (OEMs) and domestic OEMs as well as potential lot of exports."Speaking about Indradhanush —the push that public sector banks have received — Badshah says it makes banks a reasonably good investment idea in the medium-term. "We should not forget that that's a space which has been significantly under-invested from the point of view of foreign portfolios and they remain exceedingly comfortable as far as valuations go," he said.Badshah also recommends buying largecap IT companies. He sees IT companies reporting significantly larger earnings growth rates by FY17. Below is the transcript of Taher Badshah's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Sonia: The big move came into the public sector undertaking (PSU) banks all of last week and the start of this week but some of that fizzled away yesterday. How would you approach the banks now and what will be your top buys there? A: All the recent developments in the PSU banks have been more positive and even before the Indradhanush programme came into existence the whole plan revitalised the banks and increase specially from the point of view of capital infusion was in any case starting to be taken positively by the market and that also the need of the hour given that on its own this system would take significantly longer to rectify the non-performing asset (NPA) problem. So from the point of view of bolstering capital - that was a good development and then further on followed by the very welcome changes in management of some of the banks which were announced. So some of the positive developments to solve some of the crucial problems of public sector banks has started and that will gather further momentum as we go along subject to some more improvement in the overall economy as well. So broadly PSU banks given the way they are in terms of valuations become reasonably good investment cases now. However, one has to be still reasonably picky and choosy and we probably would think that some of the large public sector banks are much better placed and as of now no need to move significantly down the curve in that segment.Latha: Some of them have seen weekly gains of about 15 percent. Are they to be bought now or do you just staying put with what you may have bought and make fresh buys later? A: If you take a medium-term view, they would still be buys probably we have seen the first rally. We should not forget that that's a space which has been significantly under invested from the point of view of at least foreign portfolios if not domestic and they remain exceedingly comfortable as far as valuations go, notwithstanding the fact that we may take a few more quarter by which time the NPA problem starts getting little more better or rectifies itself. So I would think they are still reasonably long-term buys.Sonia: Apart from the public sector undertaking (PSU) banks, the other big move in the month of August has come in IT stocks like Infosys. In fact Infosys has gone from Rs 900 to Rs 1,150 in less than two months. Would you continue to be bullish on names like these? A: I think largecap IT has been the lacklustre and rightly so given the fact that growth rates have moderated. In fact in the last reported quarter, the IT sector has probably had one of its slowest earnings growth. So I would think we are now getting to a stage where probably we will start building out a little more growth. We will see a lot of differentials in growth rates even in the largecap IT companies. Of course the rupee helps further in the near-term but more than the rupee I would think, I would still be on the overall headline topline growth and you could probably see some of the larger IT companies once again developing better growth characteristics and in some cases where there is possibility of a further margin expansion, we could see significantly larger earnings growth rates particularly in FY17. So overall this space is also something which by rotation probably now starts meriting market attention. Latha: The midcaps have done so much better than the larger guys which have been largely ranged, give us some hints as to where are you looking for nuggets in the midcap space? A: I think at least as far as midcaps go, we think IT has been one area where we found interesting opportunities, niche companies, which have grown much better than the largecap IT space particularly over the last three-four quarters when the overall growth rate for the industry has slowed down, there have been position in the right places from the point of view of the evolution curve and technology and that is something which has been interesting. So I think that space will continue to gather attention -- you have to look at niche companies which are engaged more in addressing problems of certain specific verticals where we see a lot of growth so that is one area. Similarly even in midcaps, I think some of the specialised non-banking financial services companies particularly more related to housing, especially housing which is at the lowest ladder of the economy has seen significant amount of growth traction, we see quite a lot of headroom for growth still available in that area. So that is another interesting space as far as midcap in general is concerned. Auto ancillaries is another space particularly riding on the back of some of the large original equipment manufacturers (OEMs) and domestic OEMs as well as potential lot of exports. So auto ancillaries is third area where we see a good amount of traction, we have seen good earnings deliveries in the last few quarters. So I think these are the areas where we focus and we continue to build up positions in the midcap space.Sonia: What do you do with a stock like Ashok Leyland? The commercial vehicle (CV) cycle is picking up quite a bit of pace but how much of that do you think is already priced into the stock? A: We have seen past cycles and these cycles do not end; they upmove within a year to year-and-a-half time. Generally the moves all the way up as well as all the way down are more like three-three-and-a-half year to four years and we have seen an extended slowdown in the past two-three years where the market size is more than halved. So to that extent we have seen the first year of recovery. We have only seen action in the medium and heavy commercial vehicle space. Typically the light commercial vehicles (LCVs) segment follows and that segment is still in a declining phase as of yet. So there is still a lot more room to go and many of these companies are sitting on a lot of operating leverage still. We are seeing signs of improved profitability both as a result of volumes as well as raw material cost. So there is a good amount to go and operating profitability will see sharp increases in this sector over the next 12-18 months.