Optimistic on logistics; like Aurobindo & DRL: Mayuresh Joshi

In an interview to CNBC-TV18 Mayuresh Joshi of Angel Broking shared his reading and outlook on the market as well as on various stocks and sectors.Mayuresh Joshi remains optimistic on the logistics sector in the long run."We like Dr Reddys Laboratories and Aurobindo Pharma from the pharmaceutical space", he continued.Below is the transcript of Mayuresh Joshi’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: First, your thoughts on VRL Logistics. They have decided to cancel their plans on getting into the aviation space. Do you track the stock?A: Not very closely, but again with the announcement that the management had done in the commentary when they announced their foray, the stock probably did not take it in the right spirit. What has changed and the reason given by the management for inter-regional connectivity and the issues thereof, the street will grapple with what has probably transpired in these last three months. However, with the plan of scrapping, probably the stock might react positively.But certainly, I remain optimistic on the logistics sector in the long run.Latha: Wockhardt getting this establishment inspection report. I want to caution you again. We have got this from an Anand Rathi sales note, but the street was expecting this. What is your view on that stock itself?A: I will not want to comment whether they have got one unless we get clarification. If they do get one, it is going to be a huge positive as Sonia was mentioning because it is one of the major manufacturing units for Wockhardt. But within the pharmaceutical space itself, what has been plaguing them was the Food and Drug Administration (FDA) concerns and a whole host of issues surrounding that. So, the remedial and the remediation issues is what the street believes would probably get over by FY17 and FY18 numbers would start appearing far much better.The kind of pipeline that these pharmaceutical companies have both in the generic business, specifically towards the US formulations market as well as stronghold of a few companies within the domestic market, that holds them in good state for a good earnings growth over the next couple of years. So, apart from Wockhardt if they do get that, as I mentioned earlier, once those clarifications come, positive.But what we like from the pharmaceutical space is Dr Reddys Laboratories, Aurobindo Pharma and that again, with a 2-3 year view because our belief is that FY18 numbers will be far better if one assumes the remediation issues and the issues related to their plants probably getting resolved by that point of time.Sonia: What are your thoughts on some of these stocks like Hindustan Petroleum Corporation Ltd (HPCL)? Investors are making big money in this one, not just because the stock has rallied so much, but now there is a 2:1 bonus issue as well. For somebody who has perhaps missed out on this bus completely, is it still worth a buy?A: I remain extremely constructive on the oil marketing company (OMC) pack, I have always been over the last few quarters. The primary reason probably is because of their working capital constraints going down. That, the street has probably taken into its fold. But what goes forward again is the kind of marketing margin improvement that these OMCs can witness going forward.Now, you are probably seeing for HPCL, petrol marketing margins around Rs 1.70 per litre, diesel around Rs 1.6 and if those marketing margins are showing an uptrend, the earnings per share (EPS) increases significantly for a company like HPCL.I was hearing the management out. They have posted gross refining margins (GRM) of USD 6.7 per barrel in FY16. If we assume the higher distillate yields to probably sustain over the next couple of years, you are probably looking at margins at USD 7-7.5 to say the least.With the kind of expansion that they are going through, specifically HPCL, it is a huge capital expenditure (capex), both for Visakhapatnam, Bhatinda as well as their Mumbai refinery. That is going to have a huge impetus in terms of how the expected GRMs are expected to pan out over the next 3-4 years. Couple that up with the kind of debt levels and the operating cash flows, that can have a significant traction. Debt levels around Rs 21,000 crore, cash flows expected to improve significantly and dividend yields around 3-4 percent.So, OMCs remain the flavour probably for this market and my own sense is the optimism will continue over the next couple of years. The only risk factor remains the movement of crude. If crude reacts in adverse fashion over the next 2-3 years, with the kind of capex that they are doing, that can have some amount of negative impact.Not taking a call on where crude will be in 2-3 years but one expects crude to move in this range. OMCs as a pack should benefit and I remain constructive on them.Latha: I wanted to ask you about the recent bunch of numbers. Many of them have been weak. The IT pack, even the midcap IT pack, like KPIT have all declared weak results, Hindustan Unilever (HUL) did not flatter. What flattered for you? Which was the pick of the pack in terms of good numbers?A: IT did disappoint and if one goes by what the management commentary has been, the uncertainty related to Brexit probably is an unknown factor even for the managements of IT companies. Couple that up with Q3 and Q4 expected to be seasonally weak quarters, a huge amount of improvement is expected to be seen in Q2.The Wipro guidance was very disappointing for Q2. The king of execution, that one expects to come through, it will be time telling in terms of how they will be able to deliver. So, it might be a muted and a soft year for IT as a whole. That is getting evident from the numbers that we are getting on the screen.The housing finance companies is what has stood out for me. LIC Housing Finance has given a very reasonable set of numbers in my opinion. Dewan Housing Finance Corporation gave a very reasonable set of numbers and the expectations of borrowing costs coming down over the next few quarters with the expectations of non-convertible debentures (NCDs) probably taking a lion’s share in that borrowing, retail advances expected to remain strong. Housing finance as a pack has stood out.Fast moving consumer goods (FMCG) generally, HUL did disappoint in terms of their volume growth. But one needs to understand that what will come through in terms of volume growth for FMCG or consumer staples will be Q3 and Q4 onwards. A large part of the gains from monsoon or the Pay Commission will be evident only after Q2 and that will be evident in volumes after that.So, you are expected to probably assume very sluggish volumes even for Q2, but Q3 might be a game changer or the start of a volume growth activity for a whole host of these FMCG consumer staple stocks.Latha: And finally, I wanted to ask you VRL Logistics or any other logistics?A: Transport Corporation is something that I liked in the past and I continue to remain optimistic, as I said. An asset light model is what they follow at this point of time. Goods and services tax (GST) will be a game changer. So logistic companies will benefit, but again it is going to take a time period and that time lag might well extend over the next 2-3 years for those real benefits and synergies to come through. The ancillary industries might benefit from GST. But again, logistics as a pack, very constructive, Transport Corporation is something that I have liked from lower levels where investors who are holding on should continue holding on.