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    Banks could be a contra play for next six months to one year: Mukul Kochhar

    Synopsis

    In order to be considered contrarian bets, the business has to survive in a good shape and form, come out of the Covid downturn comparatively strong, not having to dilute at the bottom.

    Mukul Kochhar-Investec-1200ETMarkets.com
    With risk aversion setting in, it is best to anchor on the basis of valuations and this is what we have been recommending investors should do, says Co-Head, Equities, Investec Capital Services.

    Are you positive about some of the auto names right now?
    In the auto sector, valuations have always been supportive. These are not stocks that trade at 25-30 times earnings. Typically, the multiple ranges between 16 and 20 which is quite palatable. More importantly, these are structurally very good businesses and they have negative working capital which means free cash flow generation is very strong and return on capital is also typically very high in these businesses.

    We can start with two-wheelers. They really do not have much global competition and a very supportive industry structure. Post-Covid recovery has started and we are more constructive on the two-wheeler segment because structurally the businesses are good, the valuations are supportive and many of these are held by the rural rebound that is taking place.

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    When it comes to the four-wheelers, which is the passenger vehicle segment, Maruti which is a listed play also benefits from rural rebound but valuations are too high. We are recommending to stay away from Maruti.

    What about metals? Would you look for an opportunity to get into some of the steel majors or would you stay away?
    Metals stocks are best bought at the height of pessimism or bottom of the cycle. Some of these stocks have already had a substantial rally. So, chasing these stocks is always a bad idea but some juice is left in some of these stocks. For example, we have been recommending Jindal Steel and Power to clients but in general, after a rally, we like to be on the sidelines when it comes to the metal sector.

    Domestic institutional investors are getting hurt currently because they are underweight Reliance and there are outflows. What are you telling your clients? How can they deal with this double squeeze when they have to sell?
    On the market side, there are broader trends which investors can exploit at a time when moves are violent because of flows or technical factors. With risk aversion setting in, it is best to anchor on the basis of valuations and this is what we have been recommending investors should do. Since the beginning of March, we told investors to go into safety as nobody knew how long this pandemic is going to last. We have asked them to shun debts and go for cash rich companies because everything has corrected.

    The only large space where we see valuation comfort is financials. Unfortunately, we will not know the true picture there because of the moratorium. I think the true picture will emerge only by January. Banking is a space where valuations are attractive and that is where we are asking people to lay their bets if they have a six months to a year’s perspective.

    If I look at the market today, banking is roughly 35% of the index and that is down 35%. This has a roughly 10% impact on Nifty. If I take out banking, the market is actually modestly up for the year. So, when we look at this market construct, we are saying everything will be okay, the economy will be okay, midcaps will be okay, small businesses will be okay because everything has pretty much come up relative to the pre-Covid levels.

    However, in all this, banking is going to suffer and that construct one can question. We are saying if you are a modestly long term investor, willing to take a bet till January or early next year, banking is the place to be where you have valuation comfort. Near term flows will impact stocks but eventually valuation is where you should be anchored.

    Besides banks which you believe are a contra play for the next six months to about one year, would you buy any of the multiplexes, mall owners or aviation companies just yet?
    Yes, we would take a look at the multiplexes although I do not have a stock recommendation there as we genuinely think the leverage is something that they could come to terms with. Of course, you have to assume these businesses that are out of favour would survive and will be in a reasonably good shape. If you can make that determination about any of these businesses without diluting at the bottom and if they can come out of this cycle, they become very good contrarian bets.

    One way we have been thinking about it is that even if we lose one whole year of earnings for any of the companies, it is not more than 5-6% of the value of the company. These companies are down a lot more. Even if we build in a two-year full impact of them having to go through this downturn and eventually a vaccine coming out and things getting better, they become good buys.

    One has to be slightly careful that the business has to survive in a good shape and form, come out strong comparatively not have to dilute at the bottom and those are the kind of businesses we would absolutely want to look at as contrarian bets.

    You have not liked IndusInd Bank in the past. But there is a new management, they have cleaned up their book and they have raised capital?
    Honestly in case of banks, you are spoilt for choice today. Despite the fact that this could be a good turnaround story, . You know there is so much to take from honestly over there that we would still probably not venture there.

    Standalone it looks like a reasonable story. All you mentioned is growth. Having said that, we never were comfortable about the wholesale book. That discomfort is still there. If I did not have any choice, I would definitely consider it but today ICICI Bank is available at one time price to book and that is a very clean story and a more liquid name.

    IndusInd Bank has recognised roughly 3% to 4% of their wholesale book right now which is not sufficient. Having said that, the stock has corrected. It may be a good value but we are still looking at others just because there is more comfort there.

    What do you make of HDFC Bank which is growing in double digit and is one of the best in the industry? Also they do not need capital?
    Yes, it is a solid bank and this year it looks like that somewhat the entire pack has underperformed Nifty. HDFC Bank is also in that category. Having said that, within Bank Nifty, it has done exceptionally well. If we recommend two or three private banks, HDFC Bank always found its space there. There are two things to watch out for though.

    If you are building a portfolio, HDFC Bank has to find a space there with its high quality and best management. Most importantly, nobody right now is equipped to challenge the kind of franchise that the bank has created. We recommend investors to stay there.



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    (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
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