Overweight on auto sector; Maruti, Eicher top picks: MOSL

Telecom remains a big bet for us and we have been massively overweight since March 2019, says Gautam Duggad, Head-Research - Institutional Equities.

With economic activity resuming and markets continuing to trout ahead, it seems like things are definitely picking up. But are there any concerns that this may come to standstill once the macroeconomic indicators are revealed a couple of months down the line?
Clearly the focus is now drifting away from the lockdown to opening up. As we call it in our note, this is restarting 1.0 instead of lockdown 5.0. The market is now looking beyond the near term and trying to evaluate sectors where there can be some early bounce back. Clearly things like essentials, utilities are relatively lesser impacted segments and are gaining traction. We saw the GDP data on Friday and it states that we are going to recover in a hurry. Clearly, the direct stimulus which has been announced two-three weeks back, from a demand perspective, there is a lot more that can be done. We hope that as the economy comes back to normalcy, the government will announce more demand-stimulating measures.

From the market point of view, clearly earnings season has been tepid as expected. So far the downgrades are outweighing the upgrades 5:. We have downgraded earnings of 55 companies by more than 5% and raised the earnings of just 10 or 11 companies by more than 5%. But FY21 right now looks like an academic year where everybody is shooting in the dark as far as estimates are concerned given the unprecedented nature of this crisis.

So from the market point of view, we have seen a fair bit of up move but India still remains to be one of the biggest underperformers globally; if you compare it with developed markets or even emerging markets. We also underperformed in CY19. So clearly, we are carrying a huge backlog of underperformance. While the near term recent market movement does give you some positive hope, the fact remains that when you look at the market over the last one year or two years, we have been a big underperformer.

Would pharma continue to see a good run or would you be looking for opportunities in some of the cyclical or financials? Where would you be looking to up the portfolio?
Our view is that pharma has done a fair bit of running already. It has been the biggest performer of the last three months. The weight of pharma in the index has also doubled in the last six months; from just being 2% of the Nifty to being 3.5-3.6%. Obviously the peak was 7% in 2015. As we hear more about the economy opening up and lockdown restrictions going out, we think that domestic cyclicals will come back and we still remain positive on financials, especially the largecap financials which have got very attractive as far as valuations are concerned. If you look at the largecap financials and strip out the subsidiary valuations, the core lending book business is now available at very reasonable valuations. Clearly the next six months are going to be problematic. You will keep hearing a lot of news flows around moratoriums; possibly even job losses and stress in some of the MSME sectors. But at these prices, we are very positive on largecap financials.

Telecom remains a big bet for us. It is a big massive overweight in our model portfolio for more than a year since March 2019 and incrementally, we turned positive on auto in our model portfolio in April. As prices have fallen substantially, we made the auto an overweight from being neutral; clearly caveat being we have stocks which have substantial cash in the balance sheet; names like Maruti and Eicher are part of our model portfolio. We are also slightly neutral on consumer stocks.

We continue to avoid cyclicals and commodities like metals, oil and gas, real estate and commodities. That is how the portfolio looks right now. It is more tilted towards telecom, IT, BFSI, consumer and pharma and incrementally one change that we made was auto.

Did you turn bullish on autos or is that still a bearish call?
No, we are now overweight in the model portfolio on autos. We have been neutral for almost two years. Prices have corrected to a level from where it made no sense to be incrementally bearish. While things can take time to come up to normalcy, we just saw Maruti’s numbers for May; it is down almost 90% but there is still a slight bit of improvement and we expect month-on-month improvement to begin even though we may take some time to reach pre-Covid levels. But at Rs 4,000, Maruti at 30% to the marketcap has cash.

Some of the two-wheelers were trading at 12-14-15 times PE; these are companies which have high ROEs and high cash in the balance sheet. So selectively, auto does look good. Clearly we are avoiding names with global angle to it and names which have leverage on the balance sheet. We are more tilted towards domestic stories with cash on the balance sheet. So yes, it is an upgrade for us in auto as far as our model portfolio is concerned.

Talk to us about pharma. Do you not believe that the rally has come by rather swiftly? Most of these stocks are already at long-term averages. So for those who are looking at a fresh investment in pharmaceuticals and have completely missed out the rally, what is the view for them?
Pharma has seen a very sharp up move. It is the biggest outperformer of the last three or six months and in fact it has corrected two-year of underperformance in just a matter of three months. But as we have seen in the earning season, most of the largecap pharma have disappointed on the operation front and we have seen some earnings cut as well. The pharma profit pool for our universe in the last five years has been stagnant around Rs 20,000 crore. Possibility of this improving over the next two years is quite high but then we have been expecting improvement for the last two-three years now.

But yes, the sharp outperformance that it has delivered prompts us to recommend some shifting or trimming of pharma positions and moving towards sectors which have turned far more attractive on valuations like BFSI where largecap banks are looking quite attractive despite the short-term uncertainty. Ao we are asking our clients to trim some positions in pharma and move towards BFSI and auto. Clearly domestic cyclicals like cement can also make a comeback as and when construction and housing activity resumes. Clearly these are the two-three sectors where valuations have turned attractive and therefore it makes sense to move out of some of the defensives which had outperformed quite significantly on the back of fear trade of the last three months into some of these other sectors where valuations are providing slightly better risk reward now.