The Economic Times daily newspaper is available online now.

    Why Vivek Mavani is seeing potential in midcap PSUs

    Vivek Mavani-1200ETMarkets.com

    Story outline

    • Betting on Maruti, Bajaj Auto and Hero in auto & JK Tyre and Swaraj Engines among ancillaries.
    • Among IT largecaps, betting on TCS and Infosys.
    • Midcap PSU bets are Bharat Electronics, Bank of Baroda and Cochin Shipyard.
    I do not see a dichotomy between economy and markets. Yes, the economy is in trouble and so are 90% of the companies which are in the public domain and which are struggling on their stock prices as well, says Vivek Mavani, Independent Investment Advisor. Excerpts from an interview with ETNOW.

    Do you find fundamental opportunities in cement and if so, which pockets?
    Well not necessarily in terms of cement. Quite honestly, I do not think these price increases would sustain for a very long time because these are not demand-led. It is not that we are having double digit volume growth and there is a shortage of cement and hence, cement companies are hiking prices. Typically, in commodity sectors, that is the ideal scenario that one hopes would play out.

    Unlock Leadership Excellence with a Range of CXO Courses

    Offering CollegeCourseWebsite
    Indian School of BusinessISB Chief Technology OfficerVisit
    Indian School of BusinessISB Chief Digital OfficerVisit
    IIM LucknowIIML Chief Executive Officer ProgrammeVisit
    But in case of India, these are basically cost push price increases. Costs have gone up and price hikes are undertaken to protect margins to a certain extent. It would be company specific and location specific. It is not something that would sustain for the sector as a whole. Even if you bottom up pick individual companies, capacity utilisation still run at about 70-75% for much of the year gone by and hopefully will not improve meaningfully even in calendar year 2020. Maybe, we will inch to mid 70s in terms capacity utilisation. It is still not the time to clamour for higher cement prices because of the demand.

    The move we saw in the markets yesterday was driven by global geopolitical factor. Macros are not quite stable and earnings expectations are not looking that robust. What explains the up move today?
    After a very sharp down move yesterday, this was a little bounce back. I would not really read too much into it. Later this week, the earning season starts. The first of the result comes out on Thursday or Friday and should be keenly watched, again not so much for what they are going to report but whether the outlook will really change.

    The sectors that I would look out for would be autos and FMCG. Basically the entire consumer pack and not just the FMCG. These are names where stock prices have performed very handsomely over the last three-four years. But the last couple of quarters have seen some marked slowdown in terms of their sales as well as earnings growth.

    If that slowdown persists or gets deeper, some of those high valued heroes of the last two-three years could take some serious beating. Auto is on the other end of the spectrum which has already been beaten down. For the last one year, there was a slowdown plus negative volumes for most of the companies as far as domestic markets are concerned. So, is there light at the end of the tunnel? Maruti probably should report something on the positive side as far as outlook is concerned, but not necessarily for the quarter gone by.

    Are you comfortable when it comes to autos in terms of the green shoots of recovery that we are likely to see? Do you think there is merit in buying some of those auto ancillary names? What are you expecting by way of quarterly earnings?
    Maruti among four-wheelers and Bajaj Auto and Hero in the two-wheeler space. I am comfortable both on the prices as well as valuations. Maruti at Rs 7,000 odd, is 25% higher from the lows that it had plumbed at about Rs 5,500 a couple of months ago. These three stocks I am comfortable with in auto.

    In terms of green shoots, Maruti should give the first early signal with reversal from declining volumes to some positive volumes, even if it is low single digits in the coming few months. The collateral damage on the stock price is already done with. I am comfortable buying any of these. If they correct further, I would be a buyer.

    As far as auto ancillaries are concerned, I would focus on those ancillaries which have a very robust secondary or a replacement market. In terms of auto ancillaries, there is an OEM segment where they supply to the auto companies and then there is a replacement market as well, in tyres for example.

    I would stick my neck out over there because there you have some segments of the replacement market clocking double digit volume growth even as recently as a quarter ago. Certain segments are still at high single digits and that is likely to sustain given the entire population of vehicles in the last five, 10 years which are out on the road consuming that or creating demand.

    I would focus on JK Tyre in the auto ancillary space. Another one where I would be willing to stick my neck out where I do not see any downside is Swaraj Engines which is an indirect play on the tractor segment. Swaraj Engines supplies engines to Mahindra’s north India business. It is a very solid company trading at about 4.5% dividend yield in this market. It is a debt-free company and net cash surplus on the balance sheet. These are the kind of companies that I would be looking at.

    I am very conscious about the margin of safety and the kind of downsides I may have to see, in case the recovery takes longer than what we are expecting.

    What do you think of the 50% appreciation that the Bharti stock has already seen in the year gone by?
    I would still be a sceptic as far as the telecom space is concerned, especially the likes of Bharti Airtel. If I extend the argument to Idea-Vodafone for the simple reason that I am still not sure whether the business and revenue models have stabilised to ensure sustainable profits for the sector and a meaningful return on equity and cash flows.

    Of course, in case of Bharti Airtel, the steep rise in the last couple of months has also been because it is now a three-horse race. The third horse is likely to be a casualty sooner than later at some point of time. We are referring to Idea-Vodafone. The sector is dominated by Bharti and Reliance Jio and Bharti is already on its way to raise $3 billion which is upwards of Rs 20,000 crore which they are likely to garner in their kitty before the end of the quarter and the end of the year.

    At least Bharti has greater staying power in the game against Idea-Vodafone. The ideal case scenario should have meant good things for Bharti but I do not think that Idea-Vodafone would be allowed to sink so easily. Hence, there is instability as far as likely on business models in the future as well as the revenue models. We have to see what tariffs and ARPUs make the sector viable. I would still be a sceptic at this point of time and not want to stick my neck out in terms of getting into a trade at Bharti, where it is trading at yearly or close to multi-year highs now.

    What is your outlook on the kind of disconnect that we are seeing with what is happening on the macro front, slowing growth and projections also showing that we will not be meeting those fiscal deficit targets versus the kind of movement that we have been seeing in the markets?
    Everybody has been talking about a dichotomy. I do not see a dichotomy for the simple reason that Nifty at 12,000 is being held up only by about 10 stocks. Only eight or nine stocks have contributed more than 100% of the entire rally between Nifty at 10,000 and Nifty at 12,000 in the last 18 to 24 months.

    These are the eight or 10 stocks which have had fairly robust earnings growing anywhere from mid teens to 25%. When I say mid teens to 25%, I mean some of the private banks have grown 15-16% versus TCS which has reported 25% growth while Bajaj Finance has reported 25% growth. There is a dichotomy in earnings. Everybody complains that the economy is in a recession or a serious slowdown.We also have a handful of companies which are growing 15-25%, contributing to the growth in Nifty. The rest of the market, even now after having rallied 30% in the last four-five months, are still at least 50-60% off their all time highs, which were made two years ago in January of 2018.

    I do not really see dichotomy. Yes, the economy is in trouble and so are 90% of the companies which are in the public domain and which are struggling on their stock prices as well. A larger number of them -- 90-95% -- are also struggling on earnings. It is probably only 10% of the companies which have reported growth in the last two years or last one year and continue to report growth. Yet their stock prices are down. It is a very narrow universe that we are talking about where companies have been reporting earnings growth and stock prices have not rallied. Otherwise, maybe 80-85% of the stock prices mirror the rest of the economy in terms of slowdown and macro concerns.

    Where do you see potential in midcaps?
    In terms of the companies that have been delivering some growth within the midcap space but whose valuations have been beaten down purely because of midcaps being slightly out of favour over the last couple of years, I find a number of PSUs. Bharat Electronics, for example, is interesting. Some of the PSU banks like Bank of Baroda or even the big daddy SBI look interesting from a valuation point of view.

    Some of the other PSUs include Cochin Shipyard which has been delivering quarter after quarter and has a very healthy order book that takes care of growth for at least the next three to four years. The valuations are fairly reasonable and nothing is out of whack in terms of valuation multiples.

    The other space is autos and auto ancillaries. In auto ancillaries, a JK Tyre and Swaraj Engines remain my preferred picks. A disclaimer that I already have an interest and investments for myself as well as on behalf of my clients on that. So that is another space in terms of auto ancillaries that I am looking at.

    Third, in the largecap technology, Infosys trades at dividend yield of upwards of 3%. I am tempted to believe that the downside is pretty restricted and if they deliver even low double digit earnings growth later this week, it would make a good bet for the next few months. TCS could be another one.

    But even within midcap IT, Persistent Systems makes for an interesting bet as well as L&T Technology Services (LTTS). I am focussing on some of these stocks for the next few months to the next couple of years depending on where their earnings valuations and prices stand.



    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in