The API theme clearly is hot and that is really bringing about a bit of a market cap rotation. It is no more about the largecap names but Divi’s, Laurus Labs, Granules, Neuland Laboratories, all these names as well are propping up in the trade. Do you think the story has just begun when it comes to APIs in particular and is there more investment opportunity here.
Both Ipca Lab and Laurus Labs have done pretty well. Structurally, companies like Laurus Labs are in a different phase of growth going forward. Looking at their management’s con-call, clearly, they’ve talked about margins being sustainable going ahead. It’s very heartening for us as we can be confident of the growth on top of the line. Ipca lab is likely to be a key beneficiary going forward in terms of sourcing due to the kind of integration that they have related to other companies. Some of the other companies might face challenges on this front.
Looking at pharmaceutical companies from a risk-reward perspective, one can look at Cadila as the multiple are still a bit cheap. Considering companies from other themes such as chemicals, Deepak Nitrate’s stock has done really well over the last one year. The clear differentiator is that in the last 50 years, the company has focused on getting everything done indigenously. Hence, they are not reliant on the Chinese for sourcing and this makes the company interesting to us. The company is trading at a multiple of around 13 times whereas other companies with similar kind of ROE and pedigree are currently trading at a multiple of around 19-20. So, these are the kind of companies we are interested in and would like to stick with going forward.
What about financials? Because there has been some underperformance relative to the kind of momentum we have seen otherwise across some of the heavyweights whether it be an IT, pharma. What is your reading on the financials for the moment?
One cannot know the full story by looking at the financials as few loans would be issued by somebody and now the borrower has issues with the repayment. It is very easy for financial companies to include them as moratorium by providing provisions for just 10%. The lower interest rate regime, lower oil prices and interest rate from a global perspective suggest that financials could do well going forward. It is still a sector which has enormous growth opportunities as well. Looking in terms of numbers, SBI’s numbers are interesting even though the provisioning is on the lower side due to Covid-19. But overall we are quite heartened by the numbers of SBI and also that of the Axis bank. So broadly speaking, the recent underperformance of the financials may not continue for long. Going forward, there could be some amount of catching up by the financials in the next couple of months.
What is your sense of newer opportunities within IT or do you think it is all well discovered and well in the price?
Surely there are more opportunities.
From a largecap perspective, we like Infosys, clearly because, for the first time in 15 years, Infosys is likely to beat TCS in terms of revenue by at least 500 bps. If you look at the midcaps, Persistent has been quite consistent. The top management which has changed over the years has brought in some changes in ways the company has delivered numbers. So this is clearly an interesting company for us in the midcap IT space. We still see a significant room for upside from the current levels in the case of Persistent
Let us also get a comment on auto, given that we are watching out for monthly data and of course we saw Maruti earnings this past week but a lot of analysts still sounding fairly positive on the outlook going ahead despite the first loss that we have seen in Maruti report in a very long time.
Absolutely. They are having supply chain issues rather than demand. This seems positive for us and hence our price target is close to Rs 7,200 for Maruti. Another stock investors can consider but from a one-year perspective is a dark horse, the Ashok Leyland. It is currently trading close to around Rs 49-50 rupees. From a two-year forward earnings perspective, the stock is trading at around 10-11 times, which is extremely cheap. We have seen what happened earlier in 2008-09 when the stock went down the hill after the meltdown in the international markets. Since we think we’ll see a very strong recovery happening over next year, if not this particular year, from that perspective Ashok Leyland could be an interesting stock. Considering the stock is quite diversified, from commercial vehicles to defence, you could see a lot of traction coming over next two-three years.
Anything you are watching from the policy this week, any other ammunition that you think they may use?
Generally, considering a higher inflation rate than the band they are expecting, probably a customary 25 bps cut is what we are thinking of. I do not think anything major should be expected of the policy. The market has done pretty okay over a period of time and liquidity doesn’t seem to be that big an issue for most of the companies. So the RBI is going to probably wait for at least three-four months to see more information on what kind of damage has been done due to Covid-19 and then probably act big rather than taking big actions at this particular point of time.