Positive on IT, fin services, logistics cos: Prabhudas L

Sreesankar is also very positive on some of the logistics companies like VRL and Allcargo and points out that his outlook does not rerly on passage of the GST bill.

“If implemented, GST would only be a bonus. Fundamental business has to be strong”, he says, adding “Allcargo is part of a global business and we believe company will generate cash of Rs 600 cr over next 2 years and become debt-free, unless they go for expansion or acquisition. The projects and engineering services business, which was a drag earlier, is also likely to do well”.

VRL also has healthy return ratios, which makes it attractive, he says.Below is the transcript of R Sreesankar’s interview with Anuj Singhal and Eta Batra on CNBC-TV18.Anuj: The Fed event is out of the way. Does that change your view at all or do you still maintain your big bullish target for next year?A: We still have our view firmly in place and I do not think any change is going to be there immediately. The great thing is uncertainty is out of the way. Whether the rate hike will happen or not happen, that was an uncertainty for quite some time. A 25 basis points hike is effectively taking it out and the commentary that has followed. So, it is very clear that the Federal Open Market Committee (FOMC) will be following the economic numbers much more strongly in terms of inflation, in term of growth, in terms of environment etc. So, the next action will depend upon how these numbers turn out to be.Ekta: It is a little too early for earnings, but nonetheless we have the Infosys date which is out on January 14, and that is less than a month. We have already seen revenue warnings come in from the likes of TCS and Wipro with regards to what happened in Chennai. What is you expectation from the IT space this time around in terms of earnings and hence valuations?A: It is too early for me to talk about the Q3 numbers per se, what our expectations are at this stage. But, having said that, a couple of factors out there – what we believe as a house is every player who has got the offshore centres in Chennai is invariably going to get impacted depending upon how much the people are there and a certain impact in terms of revenue and consequently on the margins are definitely going to be there. Now, that is not going to change the view on the IT sector, we see it as a one-off event and in many cases, what we also understand is some of the companies are actually working on Saturdays or else to compensate for the loss of work that had happened due to the rains. So, it is not going to fundamentally change the view that we have, but having said that, yes, something needs to be taken on board. Second half for IT companies is not necessarily a good period and especially the third quarter is quite a weak quarter. On top of a weak quarter, if you an event like this, the impact can be a little more sharper. But our view on IT still remains strong. As US continues to grow, the growth in many of the sectors, energy is one sector which has not seen growth and which has been under pressure. Yes, that has already been discounted in the performance in many of those companies and performance of that particular vertical in many of the companies.Anuj: Among your top-picks, you have three of the biggest banks, HDFC Bank, ICICI Bank and State Bank of India. And all these three stocks have not done much for investors. In fact, ICICI Bank has destroyed quite a bit of value this year. What makes you bullish at these levels?A: We like the valuation at ICICI Bank at those levels and we think and we believe that ICICI Bank and among the private sector banks, our preferred pick has been, if you actually look at it, we have had HDFC Bank consistently in the preferred pick. We have IndusInd Bank in the preferred pick because of the prices being steeper, rather price targets being achieved and also the fact that we believe that incrementally there may be some cost pressures coming in, etc. We have actually removed IndusInd Bank from the portfolio. Then we do not like the public sector banks. Among the public sector banks, we think State Bank of India is the best bet, so we continue to believe in SBI, so the valuation looks much better. And so is the case with ICICI Bank among the private sector banks purely on the valuation growth that we have.So, we continue to like that space. Even the financial services is a space that we like and we believe that we are always financial services number one. That probably might not have worked in the last month, etc. but we continue to have a view that economic recovery and the growth in financial services is going to be sharper. Having said that, when a lot of events like non-performing assets (NPA), stressed assets, some of the large corporates having a stressed assets, its impact can have a negative bearing on the stock prices in the short-term and that is what we are seeing in the stock prices as far.Ekta: There was some positive news on Aurobindo. They received another US Food and Drug Administration (FDA) approval. I understand that you look at this stock. It is one of your picks, tell us about it.A: We continue to like Aurobindo. Aurobindo has been part of our top-picks for a better part of one year and more than 12 months, it has been consistently in the top-picks. Apart from Aurobindo, we also have Glenmark into the top-picks and so we continue to like Glenmark and Jubilant Life Sciences. We like all the tree and our analyst likes all the three and consequently like all the three and we believe that all these three stocks are going to continue deliver strong returns over a period of time. Having said that, you might have seen bouts of huge outperformance in case of Jubilant an Glenmark and then in many of these stocks, there may be a period of underperformance. Probably, Glenmark is undergoing that, but we still feel optimistic on all the three, Aurobindo, Glenmark as well as Jubilant.Anuj: Let us talk about some of the midcap stocks. You are bullish on a couple of logistic names, VRL and Allcargo. Are you not worried about the fact that the GST is now getting postponed yet again and what is your premise for buying some of these stocks now?A: There are two factors when we look into the entire logistics pack. GST is to our mind, it is only a bonus. First the fundamental business has to be pretty strong. And when I look at Allcargo, it is again a global part of the business, consolidated entity has got a global business and we believe that Allcargo should have a cash generation of closer to Rs 600 crore over the next two years. And it should be a debt free company. Their project in engineering services business which has been a drag earlier, rather poor returns in terms of capital ratios has been starting to give a better return. That is number one.Number two, their strong cash generation effectively makes it into a zero debt company unless they go for an expansion or an acquisition or something of that nature. So, it should be a net cash company in the current year. That is one big positive.Second, if I look at the kind of exim trade, exports are not doing well and on the Container Freight Stations (CFS) side, 96 percent of their revenue actually comes from imports. So, as long as imports continue to be on the higher side, growth volume may stutter, but we still continue to believe there is strong cash generation which will happen from there.Third, coming back to VRL, we fundamentally like that business. The business throws in a return on equity (ROE) in excess of 25 percent plus and this company has done its major capital expenditure (Capex) already and it is in a space where 85 percent of the business is in unorganised sector and you continue to see this company going forward, expanding and for that incremental expansion, I do not think they need further equity raising, etc. Their cash flows can meet the Capex that they are continuing to do. We like that business and as and when GST comes, it is a bonus. So, that will be the bigger kicker.