Midcap rally may have hit a pause: Yogesh Mehta

Cement has a long way to go from here but the current rally leaves hardly any room for upside in all the big names, says Yogesh Mehta, Founder, Yield Maximisers.

It seems the sensitivity to the US bond yields is bringing a fair amount of volatility in the Indian market?.
The rising US bond yields are creating such a scare for equity markets especially the emerging markets and led to a pause in the ongoing rally. However, the midcap rally had been continuing but we may see a pause there today onwards.

There has been much frenzy in large caps. But since the last one month or so, only the midcaps were turning up and in largecaps there was a sectoral move. One by one, all the sectors were turning up and of late, first metal and then PSU banks and then PSU companies on divestment agenda had started going up. It seems there is a lack of buying and FIIs numbers are not showing that true colour of the market. We may enter a consolidation zone or a correction mode. Nobody likes to talk about corrections or downfalls, but we may enter into a phase of consolidation and the upside seems a little hazy till we enter the annual result season.

What is your opinion on the acquisition of Capco by Wipro? Will integration prove to be a major hurdle?
Wipro had a lot of cash in its kitty for many quarters. Out of that, they have done a buyback also. The acquisition is good in terms of longer term vision. But integration may take some time. Right now, leadership is lacking right now for handling this kind of client set and the services they will be rendering via this acquisition. So it will take some time but nevertheless it will pay off two-and-a-half, three years down the line. One should not look for immediate positive reactions from the investors right now. We have seen many acquisitions done by Infosys, HCL Tech, Tech M over a period of time. We have to give this some time.

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Nevertheless right now, it is EPS accretive by hardly 2 to 3 percentage points. But in the longer term, I am sure that it will prove to be good. Wipro was waiting for the right candidate to acquire and utilise the cash from the balance sheet. Right now, it seems there will be stretched valuation for It companies in FY22-23. In Q4, even if there is 5-7% growth rate in the top line numbers, it is already priced in. At around Rs 420-430, it will be fairly valued and I do not see that there is any immediate upside for the time being.

What is the outlook on the cement sector? What do you like in this space?
We have a bullish outlook on the cement sector. Even a 4-6% volume growth over Q3 to Q4 will neutralise the incremental capacity addition. The UltraTech and Ambuja Cement and ACC plants are running at almost at 90-92% capacity.

The southern region has seen a price hike of Rs 20 odd per bag and it will be effective from this week also. Earlier also, the price hike was visible. Incremental demand has gone up, pent-up demand was one of the reasons for growth in demand in Q2 and Q3. Now in Q4, incrementally new order flows have come up in terms of government orders and other commercial and the residential projects along with the infrastructure developments. Cement has a long way to go from here but the current rally leaves hardly any room for upside in all the big names. ACC is traditionally discounted by 20-30% though their capacity utilisation is around 90%.

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Midcap cement could be a good attraction wherein Rajasthan based

plant is still valued at around $100 per tonne. On an EV to EBITDA basis, there is more room to go from here. The south-based India Cement can also see a good price hike and that may turn in their favour. At around Rs 180, it is also a discounted stock.

Among large caps, I always prefer UltraTech because they are going for businesses as a brownfield acquisition. It is always a positive turnaround for them and the balance sheet and cash flow is also generated from time to time. It may command more premium valuation than the peers and will remain in leadership position as a sector. The growth rate probably would be much higher. Nevertheless the price has moved up from Rs 4,300 odd to Rs 6,700-6,800 in just three months on a quarter-to-quarter basis. It is a stock to add on dips. At the current juncture, it leaves very little headroom for all the stock prices in the cement sector.



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