Why Prabhudas Lilladher is bullish on these stocks

Prabhudas Lilladher put out its 24-stock monthly model portfolio last in May, which included a number of financials such as HDFC, Kotak Mahindra Bank and IndusInd Bank.The brokerage is also bullish on Maruti Suzuki and Navneet, among others.

In an interview with CNBC-TV18, Prabhudas Lilladher, Head of Institutional Equities, at the firm discussed various stock ideas and outlined why it is positive on them.Below is the verbatim transcript of R Sreesankar’s interview with CNBC-TV18's Anuj Singhal and Reema Tendulkar.

Anuj: Let us start with the stock we were just discussing, Kotak Mahindra Bank. That is one of Prabhudas Lilladher's top pick. Do you get a sense that some of these retail stocks have run up a lot of and need to correct or you think even at these valuations they can be bought? A: My thought process is effectively you will see these banks continue to do well and you always will see these stocks run up in terms of anticipation. So, let us look at the first level. The first run up actually happened with almost all the agro chemical companies. If you look at two months back from where Rallis, UPL, PI and everything. That is the first range of rally you saw. Then you have seen the banks correction after the non-performing assets (NPAs) etc. The banks are actually seeing the improvement effectively and you will also see the performance coming from even the FMCG companies in anticipation of typically the good news which is coming out from a good monsoon and ultimately resulting into increase in consumption and higher disposable income leading to an earnings growth. That is what the thesis is and that is the way investors do think. So, you see a lot of these stocks move in anticipation. So, what generally happens is even if we have an earnings estimate of x, let us assume that we have a 22.5 percent earnings growth for FY17 for the market and significant amount of that earnings actually is coming from banks.Now, even traditionally what we see is market price earnings multiple expand even before a lot of analysts actually start to revise their earnings estimates upwards. So, that is what we are seeing. The stocks have moved up in anticipation of a good monsoon. Let us not forget Q4 performance in general has been better except if you look at IT, Infosys as better but you had more misses there than beats.In general the commentaries have been pretty positive, that also is something that one needs to bear in mind. Reema: The two themes everyone is talking about, one is NBFCs, the second one is your monsoon related plays. Not too many stocks from that list make it to your top picks. Any particular reason for that? A: Again as I specifically mentioned monsoon theme is again in anticipation what you are projecting. We really do not know whether this is something which we are going to be very clear that it is going to be excellent monsoon, so immediately what is going to be the benefit. So, we have looked at something which we have a convincing story and it is not an event lead story for a shorter term and what we will be more comfortable is looking at some of the consumer names, looking at the retail banks will continue to do well and that is how the portfolio construction has been more or less done or rather the recommendation for the stocks have been done. Not thinking in terms of event based rally - event based pick up in our topics. Anuj: Among your other top picks I was looking at the list. Maruti Suzuki, you have price target of Rs 4,437. Do you think this Yen was actually an excuse for correction and was a buying opportunity and what is the next trigger for Maruti Suzuki going forward from here? A: Again some of these stocks, what you are looking at is May top picks. So, for June there could be changes and that will be out by next week. So, at the end of the day there is certain kind of resistance which will come for some of these stocks. Maruti's price target itself is Rs 4,437. So, I need to revisit and think today how much is the upside that you have. It is going to be extremely low. But our thought process is there could be events, one offs which could probably make the stock underperform for a period. But we do not take away the stocks from our top picks. So, we do not move away from the stocks at that point of time. Though if they are fundamentally strong, gaining market share and things are on track the short term blips that you continue to see in terms of currency fluctuation or short term underperformance in terms of off take etc can be easily offset over a longer period of time. That is the way we take a call. So, before releasing the report I don't want to give any comment on whether it is going to change but definitely these are the kind of points that we take into consideration when we look at the top picks recommendation. So, Maruti Suzuki has been a consistent stock in our portfolio. It is not that is has come in one month, it has gone out the other month and it has come back. No, we are consistently clear on Maruti Suzuki as a stock which should do very well in the passenger car segment, especially with the product profile that they are having across the segment and it is giving a serious competition to a lot of established global players as well. Reema: Education is not a sector we often talk about as well as the stocks there. In that you have selected Navneet Education as well as NIIT Limited. In fact Navneet Education you recently added to your top picks, why is that? A: Because we believe that the kind of a steady growth - the good and bad thing about Navneet is, the good thing is the Q1 is extremely good probably because it is connected to a great extent with schools you will see a significant amount of its revenue and net earnings coming out of the first quarter and after that it will go into a lull in terms of performance, nothing exciting happens. So, it is more of a steady stock over a period of time which will continue to do well, that is number one. Number two, let us look at even Navneet. Our estimates is that you don't require a large amount of cash to be raised or capital expenditure to be done in that kind of stock which is going to be a free cash generating stock for continuous period of time. Three, its payout ratios are also good and capital return ratios are above 20 percent etc. So, we love stocks from a point of view of free cash generating, do not have a large amount of capex. All the capex can be met through internal generation and there are also as and when some of the subsidiaries or investments that they have get listed you will see a bigger kicker also coming out of it. That is precisely the reason why Navneet is also there.