It seems that some attention is going to some of the private sector financiers like Bajaj Finance. What do you think of the results season so far?
Much of the profit has already been incorporated and there have been no negative surprises so far. Provisioning increased and they suffered a bit from the extended lockdown, especially in the Maharashtra region, but Bajaj Finance weathered the storm well. The stock was an indicator and led ahead. I think Rs 4,700 was a very large base and that becomes the key if you are to be in the large caps which we think you should now. Bajaj Finance, which is a big NBFC, fits into that.
But some of the smaller NBFCs also weathered the storm well, particularly L&T Finance and M&M Finance. These are two of our top picks. They are also very good indicators of the growth of two-wheelers and tractors and they could outperform Bajaj Finance.
But Bajaj Finance, at these prices, will see a lot of buying because people would like to be in quality names. Right now we also like to be in quality large caps because with the Nifty at 14,600 the margin of error in mid caps can be a little less.
In the case of the automobile basket, do automobile and ancillary stocks seem to be gaining momentum? Tata Motors is doing very well.
Correct. Who would have thought of that six months ago when Tata Motors was below Rs 100? One disclosure, Tata Motors and Ashok Leyland were two of our top picks starting at Rs 120 and Rs 50 and they were relatively outperforming as we expected the utility vehicle market to decline much faster. Even though the recovery will be back, you will see a lot of positives.
Tata Motors is rising not only because of the Tesla talks. This is more due to the shift in the utility vehicle (CV) cycle and this is evident with some of the CV lenders. OEMs have been healthy, whether it’s Balkrishna Industries, Apollo Tires, or a Motherson Sumi. The whole car basket is the most coveted item at the moment as consumption is back and rural incomes have given new impetus with stocks of tractors and two-wheelers doing extremely well.
So stay focused, but for now, valuation is not on our side. We have seen a wall of liquidity and this will continue to fuel names that are reaching new heights. Tata Motors seems poised to touch Rs 295-300 and we again advise you to SIP rather than buy directly as the risk reward may not be favorable before the results.
Asian Paints and Bajaj Auto results are out today. This earnings season isn’t really about growth, but it’s about valuations these stocks are already registering. Do you agree?
Bajaj Auto and Asian Paints are growing. Asian paints are becoming more and more expensive as they are making more and more inroads with market share in the decorative segment.
Bajaj Auto’s numbers are the result of huge cost reductions and their export-centric model has worked very well. But I would be a bit more focused on pharma names. There can be a huge surprise on some of the pharma income. One disclosure, two of our top large-cap picks in the pharmaceutical pack – Divi’s Lab and Sun Pharma – may be outperforming. Divi’s and Sun are now entering a new cycle and I am very sure earnings will surprise on the upside. Divi’s is heading for Rs 5,000 this year and Sun over Rs 750. With Nifty over Rs 14,600 we want to be a little less beta on autos and metals which have far exceeded valuation. We will therefore focus more on pharma, which would be one of the best performing sectors with IT in 2021.
What does a stock like Asian Paints or Pidilite have in store for an investor? The multiple EPs are almost 100! Do you think an investor would be better off ditching Asian Paints? It’s a great company, but it might not be a good stock for the next couple of years.
People who doubted Asian Paints and Pidilite missed it and it’s the same with Nestlé. They don’t trade cheaply, but the market psyche was that these are just monopolies getting stronger and this is the same with some of the FAANG stocks where only market share was acquired. I agree with what you are saying. We cannot justify this price for Asian paintings but the problem is that at ground level their single model is suitable for all homes. So the myth that they are the used paint and the cheapest paint is history. The growth of their decorative segment has been one of the best.
MRF and Asian Paints are two companies that have never diluted their equity and have steadily grown in size and market capitalization. You can’t see a lot of delta, a lot more beta on other stocks, but as a core portfolio very few people will drop Asian Paints or MRF. The house is therefore divided. If you are looking for blue chips then Asian Paints is one of them, but if you want to make the money then maybe IGL, MGL will give you a 50% run since utilities gas are in the best space.
Is there any money to be made in Britannia after the recent underperformance?
This is one of our top picks. We had it in our portfolio and we continue to believe that Dabur, Britannia and Nestlé – all three will be huge market makers. Britannia has underperformed because there have been corporate disclosures in the area of business loans. Now that the company has clarified, this is standard procedure. There was no other incident. The market has become a bit suspicious. The Morgan Stanley report says Britannia’s rural reach is here to stay. A lot of competition comes from Nestlé and ITC. Sunfeast is a really big brand but you have to be a part of it.
So, ITC, Nestlé, Dabur and Britannia should be part of your portfolio because you can’t miss the consumer market which is ready to go. Note that we are overweighted on Britannia and Dabur.
A mid-size company that you particularly trust?
Take it with a pinch of salt. At Rs 25, no one wanted to touch IDFC First Bank. It has doubled to Rs 50. I can say that this Diwali, it will go to Rs 70 and more. IDFC First is a big turnaround. I am very optimistic about Mr. Vaidyanathan. The book performed well, the CASA ratio, net interest income and the transition from an MSME to a retail book.
IGL and MGL have a lot of potential as the auto boom has a cascading effect on the side of CNG, PNG and in Delhi Indraprastha Gas Ltd will see a price hike in the coming weeks. Thus, IGL does the job perfectly for a target of Rs 750. Among the large caps, it must be Divi’s Lab, Sun Pharma and ICICI. These five elements will be a very large part of your portfolio and you might be looking for exceptional returns.