Even midcap IT companies aren't exciting: Dipan Mehta

Talking about oil and gas Rakesh Arora Independent Analyst said there were tailwinds for this sector when the government decided to do away with controls. “These stocks will do well even in medium-term. They will be driven by GRMs and transmission volumes."

In cement, stocks have factored in the good news which could come through. “Second quarter is weak in terms of volumes seasonally and volumes are down 20 percent seasonally.” He expects Q3 to be when the disappointment will come in.

Everybody will be eyeing slippages in banks on a year-on-year basis. Everybody is looking at slippages YoY.

Zinc is in short supply, he said, adding that prices have moved up in steel, so have costs. Everything depends on how China behaves.

Sanjiv Bhasin Executive VP-Markets & Corporate Affairs IIFL, said that there is cyclical recovery in cement and steel. In cement, UltraTech Cement is his favourite play. He is also bullish on JK Lakshmi Cement.

Among NBFCs, he prefers to be Bajaj Finance, Bharat Financial Inclusion and Satin Creditcare.

Dish TV is his top favourite in media. He is also bullish on Rallis India and SRF.Below is the transcript of the discussion with CNBC-TV18\\'s Latha Venkatesh and Anuj Singhal.Anuj: You have been a bear on the Indian IT sector specially the large cap ones. Do you think this earnings season will give us one more reason to be bearish or do you think the stocks have corrected enough? On Infosys in particular how would you approach that?Mehta: We remain extremely bearish on the IT stocks and they have corrected mainly because the price earning multiple has in fact compressed. Going forward earnings will be flat for several quarters and there are structural issues within the industry, volume growth is not picking up on one hand and their cost keeps on increasing because of higher visa costs as well as increments which are 7-8 percent every year. So, margins are also under pressure and although there is this whole opportunity about digitisation, the base effect of these companies is so huge that even the whole digitisation which is underway and they are making great headway in terms of getting more and more portion of the revenue from that high growth space but it is not enough to take care of the losses which are there on account of the other segments.Latha: High base would be for the biggies which are in the Nifty, is that the comment for the entire sector, even in the midcaps you won\\'t touch anything now? Mehta: Until about six months ago we were positive on the midcap part of the whole sector because they were doing intelligent acquisitions and even smaller sized deal wins were making a difference. However in the last 12 months even midcaps have not really performed, with the exception of may be a company like 8K Miles or Tata Elxsi or maybe Persistent Systems which is entirely and largely into digitisation, I think prospects for the entire sector midcap, largecap doesn\\'t look that exciting.Anuj: Oil and gas of course after a long time we are seeing all parts of oil and gas do well upstream, downstream, gas companies, transmission what’s your key expectation from the sector and your key stocks to watch?Arora: Clearly there were tailwinds for the sector and the government decided to do away with controls and rerating was always on the cards and investors are waking up to the new paradigm now, so I think these stocks will continue to do well even in the medium perspective. They will be more driven by the market forces like GRMs and transmission volumes etc, but overall now this sector becomes more investible, so I think this will remain on radar of all investors.In terms of stocks have moved up like all other market, everything has moved up, so investors can wait for some correction to get into these names. Clearly GAIL etc are more utility kind of businesses and they can attract a long term capital, so they would remain more favourite as compared to say refining and marketing companies.Latha: Your thoughts which might surprise in terms of earnings and what are you buying?Mehta: I think oil marketing companies. The base effect goes in their favour. I think HP, IOC had played losses in the last quarter, so September quarter so nice alpha will be visible at least that is one and there are lot of scope for these oil marketing companies to get benefit from their marketing margin, but I think for retail investors if they look just beyond the oil and gas marketing companies, there are whole host of companies which are servicing these oil marketing and ONGC like say Alphageo or Deep Industries and the flavour of the market is small midcaps, so I am looking for results from these companies more than the oil marketing companies, yes Aban as well. There is a lot of action happening in the oil services business after a long time and you could see many surprises over there.Latha: You have been tracking this segment for a very, very long time. Is all good news in the price and will it be in the first place much good news or is it just waiting for good news?Arora: The stocks have already factored in any possible good news which could come through.Latha: So will there be bad, will they be below par?Arora: People are enthused by the fact that cement prices haven’t really fallen during this monsoon which everybody expects to fall, but costs have risen quite strongly, petcoke prices have more than doubled and normally Q2 is a very weak quarter in terms of volume seasonally, so volumes are down seasonally 20 percent. The fixed costs per tonne jumps up quite materially and secondly most companies take their annual maintenance shutdown during Q2, so there is not too much of a supply pressure also either way.I think Q3 is the where the disappointment will come in more, because Q3 is where prices normally correct and if this time prices don’t really move up sharply to compensate for the cost, we are looking again the earnings downgrade cycle which will happen, plus everybody is hoping that the demand will pick up, that hope is there for lot of other things, but at 50 PE there is very little margin for error. This is a good top down sector with nothing to buy.Anuj: Your thoughts on cement it clearly one of the leadership sectors along with banks and autos, but which one will you watch out for and would you be bullish on stocks or you think most of the run is done now?Bhasin: I think yes the cyclical recovery is there and cement and steel have led from the front. You have seen Tata Steel hit a new 52 week high today, so it’s telling me that even though the cement volumes have been subdued, the pricing front has been very, very positive and we saw that last quarter in the numbers of all 3 majors UltraTech, ACC and Ambuja.We have added Ambuja in this recent fall around Rs 250, we think that margins can actually surprised on the upside and UltraTech continues to be our favoured play. ACC is still at USD 170 per EBITDA/EV would be very, very expensive, but I think that will slowly get factored in. For us the winning point was JP’s deal which the UltraTech bagged at about USD 117 that gave it the added kicker and on midcap we have been very bullish on stock called JK Lakshmi Cement, so like I said the sector maybe slightly overpriced, but you will always find good bargain and stocks just like Rs 250 seems very, very lucrative price for Ambuja now and we think 2017 will actually see the enterprise value maybe shoot up to USD 200 as construction activity goes up in full form.Latha: Non-bank finance companies - which will stun with their numbers, where are still buying opportunities?Bhasin: They all trade at exceptional prices now and most of the good news is there but definitely if there has been something which has been the theme of the year, month and the season, it has to be NBFCs. So, Bajaj Finance definitely should be on top of the list along with Bharat Financial. However our top pick over there would be Satin Creditcare which we think the NIMs at 9 percent being maintained would be a standout performer. However you could see a little bit of plateauing of the numbers because volumes even though are going to be very good, we think the guidance from here would be little bit subdued. So, we have these three which is under our radar - Bajaj Finance, Bharat Financials and Satin Creditcare. The top two being slightly more expensive and we would use declines to buy and we are holding on to positions because we think this could be actually the sun shine sector continuing till 2017.Anuj: Your thoughts on banks in particular?Arora: Banks basically everybody will be looking at slippages and it will be more like year on year (Y-o-Y) slippages rather than quarter on quarter (Q-o-Q) because Q-o-Q you expect them to come down in any case.I think the two biggest things which people watch out for will be the watchlist of Axis and ICICI Bank. How is the guidance going to move on those two watchlist is going to determine which way the sector goes. I think it is too early to really expect too much of a material improvement in either asset quality because even though things have improved for sectors like metals and infrastructure, the hole was too big to fill by a little bit of improvement in earnings. So, slippages will continue to increase rather than decrease. I think these stocks will remain under some kind of pressure in the upcoming results.Latha: No PSU Banks?Mehta: It could be a good trading bet because they could optically give a very good set of numbers on account of lower provisions. So, one could look at a trading play over there in PSU Banks. Apart from that I think many exciting companies in the NBFCs which we haven’t covered like gold loan companies Muthoot Finance, Manappuram. Micro finance companies including Equitas as well as Ujjivan. I think the bank to watch out for would be RBL. Anuj: Anything which is a buy for you in metals space? Arora: This sector has rerated quite strongly. Whatever you may talk about, it is just about China and we are expecting that China demand will continue to remain strong at least into the first half of FY17 till the time the elections have happened. So, till that time government is likely to support growth by infusing more money into infrastructure spending which is commodity intensive. So, with that kind of an outlook of next 5-6 months at least looking pretty strong, I think these stocks will continue to hold on and might even gain further from hereon. Zinc is a commodity in particular where there is a short supply, others are not so much in a short supply but Zinc is in short supply. So, you can have exposure to Hindustan Zinc or Vedanta, these are the two plays.Steel would be having a weak quarter. While prices have moved up recently but so have costs. So, wait and see, MIP or no MIP it is not going to make a too much of a difference, it is how China behaves which is going to decide where they settle.Latha: So, you are still buying the metal stocks?Arora: I would say that they have moved up quite a bit, so you have to be ready for a big decline also. At the moment next 6 months look pretty okay and there could be further gains to be made.Anuj: We discussed about 8-10 stocks media and chemicals. Anything that you like in the space, all of these stocks have done well?Mehta: I think correction looks interesting to buy, but the stocks didn’t cover are the theatre companies PVR and Inox they have a blockbuster quarter considering all the releases which have come. All of us have seen more movies this quarter than before, so really looking forward to numbers coming out from Inox as well as PVR.PVR has already run up because of the acquisition news which came through, so Inox could be a kind of bargain at this point of time. Having said that both companies we have investments and we have recommended to our clients.Latha: Your thoughts?Bhasin: For us Dish and Zee continue to be the top favourites. We have also added Sun TV at the steep discount in valuation it has to Zee now and we think the elephant in the room is the health of the chief minister and if there is more ambiguity, this stock is only going to gain traction. For us these 3 stocks are our top pick.Also on the chemical side Rallis India would be our top pick, which we have been very bullish on, on the pesticide agrochemical side and we would add an SRF and Atul which we have been extremely bullish and which we think will gain the maximum from the environment issues in China.