Manish Sonthalia of Motilal Oswal Asset Management is bullish on oil marketing companies and rates BPCL and HPCL among his top picks. He says he is not bullish on upstream companies like ONGC as he feels crude prices will remain in a band between USD 40-70 for a considerable period of time.
There is little scope for rerating of price earning multiples of IT companies unless there is an improvement in guidance, feels Manish Sonthalia of Motilal Oswal Asset Mnaagement. He feels if there is a favourable movement in currency, midcap IT names would benefit more than large caps. However, Sonthalia says he would prefer to stick with the large cap names.
He is bullish on oil marketing companies and rates BPCL and HPCL among his top picks. He says he is not bullish on upstream companies like ONGC as he feels crude prices will remain in a band between USD 40-70 for a considerable period of time. Upstream companies would be trading bets depending on crude price movements, and not fundamental bets.
Below is the verbatim transcript of Manish Sonthalia's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Let me start with those industrial output numbers itself, are you sufficiently enthused by those numbers to go out and buy any of the capital goods or consumer goods stocks?
A: If you see the details of the capital goods numbers, there was one item which saw an exceptional growth and that was rubber related products. It saw some 250 percent sort of a growth. So nonetheless, the manufacturing has come in at a 34 months high at 6.9 percent that itself should be a good reading on the numbers.
However, talking about capital goods, the order book position has got better, execution is somewhat better, this quarter you should be seeing something like 14-15 percent sort of a growth. So all in all, it would be very stock selective and on the largecaps, it is obviously the likes of Larsen and Toubro of the world which would be finding a place in our portfolio. In the midcaps, we have Container Corporation, we have Voltas etc which would be there in our portfolio.
Latha: No consumer durable that you would add, they are all jumping up today, Hitachi, Blue Star, Lloyds, anything that you pick up?
A: So we have a Voltas, which is a play on consumer durables as well and we are very upbeat about the stock, it has a decent allocation in the portfolio so just look to add on this name in the portfolio.
Sonia: You also have Tata Consultancy Services (TCS) in your portfolio and we have seen the Infosys numbers -- the numbers were good but some things about the fineprint whether it was the chief financial officer (CFO) resigning or the volume growth was tepid or some of the comments that H2 could be challenging, that spook the stock a bit. How do you see the entire IT pack move and what would your expectation be from TCS itself?
A: The quarter we saw basically good numbers come out of a traction coming from currency and if Infosys is guiding that we will see cross currency headwinds and rupee is also somewhat expected to appreciate in the extreme short-term.
So it all boils down to valuation and growth in Infosys with the superb numbers, which is declared but the muted guidance somewhat give an idea that if you would be looking at anywhere between Rs 60 of an EPS for FY16 and Rs 64-66 for FY17. Whether there is a case for multiple expansion from current EPS, the answer would be a clear no unless and until we see some intra-quarter guidance getting revised upwards. That is something which has been left on the table by the Infosys management. However, this is not to begin at the beginning of the new quarter.
Expectations are somewhat muted as far as TCS numbers are concerned. If they do better numbers than what Infosys has done, obviously that would be some sort of a surprise for the street and maybe TCS could rally more than what Infosys did because a lot of expectations were already built in Infosys numbers.
So it would be a case of an Infosys and TCS as far as the largecaps are concerned. Midcaps -- I am not very excited about the entire bunch but obviously currency benefits would look more exaggerated in case of midcap stocks but clearly as far as my strategy goes, I will be sticking with the largecap stocks.
Sonia: From the auto space, you have a couple of stocks like Eicher Motors, Bosch, Bharat Forge that have now started to resume their uptrend -- will you continue to back names like these or will you also look at some of the very beaten down names say something like a Tata Motors or something like a Motherson Sumi that may look more attractive now?
A: Those stocks would already be there on our radar and we are not very excited about buying these names just yet because of the known problems for these names. Talking about the names that we have in our portfolio -- we seem reasonably confident about what sort of a growth numbers would be seen for these stocks.
As far as Bharat Forge is concerned, yes there has been some haziness and demand between last quarter and this quarter both in terms of exports revenues and also the domestic growth. However, it seems that everything is there in the price. I don’t see too much of a downside.
The stock has already corrected from a 30 price to earnings ratio (P/E) to a 20 P/E given the growth which was to be north of 20 percent now should be anywhere between 15 percent and 18 percent as we move into FY17. So valuations are looking more reasonable, there is more comfort in buying the names that we have in our portfolio rather than looking to add anything new particularly the names which you took because of the uncertainties surrounding these names.
Latha: We have seen that dip in crude prices. Do you have anything or would you persist buying any of the oil, gas stocks?
A: We are very bullish on the oil marketing companies (OMCs). This quarter you will see the inventory losses and maybe that is the reason why the stocks are consolidating. So Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) would be the top picks that we have in our portfolio management services (PMS) portfolio.
The journey looks quite interesting as we move into the future particularly from the point of view of the marketing margins, which to our minds may not have peaked out. Gross refining margins (GRMs) also has a scope to move on the higher side. An inventory loss is something which is an inherent part of the entire business model.
So given the valuation, the higher dividend payout scope, which exists on the OMCs, we are only excited about the downstream companies and not at all the upstream companies because we think that crude is going to remain in a band between USD 40 per barrel and USD 70 per barrel for quite a considerable length of time maybe for next two-four years. So it is a case of buying and then selling. So more of a trading bet rather than anything to do with fundamental long-term investment.
Sonia: From the midcap banking space, it is interesting to see you have DCB in your portfolio and that bank announces its numbers later today. Last quarter the numbers were quite muted and then the stock went into a consolidation phase, are you confident that the bank can return to the growth path and what would your expectations be for this quarter?
A: Going by what the management is guiding, doubling of balance sheet size in next three years, this quarter we are going to see some margin expansion, 3.8 percent is what we are building in.
The tax rate has gone up so at the profit after tax (PAT) level, you will see somewhat year-on-year (Y-o-Y) flattish sort of a growth if they are able to manage the asset quality as they have been doing in the past, it is a case of following return on assets rather than return on equity, they are self-sufficient in capital.
So let us see what the numbers would be like. A small bank growing very aggressively with very limited non-performing assets (NPAs), I think it is a case of good growth going into the future, which may not be there entirely in the price. That is the main reason why we have DCB in our portfolio.
Latha: You have Speciality Restaurant as a very small part of your portfolio, 0.5 percent. Considering that you are seeing some kind of urban consumption, if the IIP numbers were to be believed would you up this number, would you include Jubilant Foodworks in it, is this a stock that attracts you?
A: The multiples on Jubilant Foodworks may not be very exciting but because of the base effect on Speciality, there always exists the case for upping the allocation on this name. Last quarter also we saw decent numbers on a Y-o-Y basis. We saw 19 percent sort of a growth and profits -- of course the base is very small but if urban consumption was to play out and we see decent same store sales growth (SSSG), added to that the new restaurants, which they are opening coupled with some price increase in the menu should lead to a good growth at the EBITDA and the PAT level and which may not be entirely in the price. So we are just waiting for the numbers to show some stability and some visibility going to the future, definitely we would be looking to up allocation in this.
Sonia: Overall further earnings season itself what are your expectations for this quarter as well as for FY16, have you scaled down your estimates further?
A: This quarter obviously the commodity related names will see some big knock on a Y-o-Y basis. So if we were to just exclude the commodity, metal companies, the refining and marketing companies, these are the three names which will have a big bearing on the overall numbers. I think numbers would look pretty decent -- 5-6 percent of a topline growth, 7.5-8 percent EBITDA and something like 12-13 percent at the PAT level which is incrementally positive from Q1 numbers. Going forward also I think the raw material cost benefits should percolate down into margins and this would be reflected in the overall earnings as we move into Q3 and Q4.
Overall this FY16 earnings growth would be limited to 9-10 percent when we compare it on FY15 basis. FY16 is going to be a margin expansion story, FY17 we are building in some sort of a volume growth for consumer related names and even the base effect is expected to play. We should be clogging in something like 18-20 percent growth in FY17.
So that is how earnings expectation has come down from 15 percent to 10 percent for FY16. Recovery is delayed, a lot of heavy lifting has to be done in Q3 and Q4, incrementally Q2 should be better than Q1.The Great Diwali Discount!
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