 "Jimeet Modi")
Jimeet Modi, CEO, SAMCO Securities in an interview with Tulemino Antao shares his view on trends in markets, March quarter earnings, monsoon and stocks to buy.
The exit polls indicate that the BJP is likely to emerge victorious in the Assam assembly elections. What impact do you see on the markets in the near term and what range do you see for the Nifty for the second half of the calendar year?
Historically state election results are considered as non events by the markets. The emergence of BJP in the Congress bastion only gives a reassurance that the citizens have become smart and are looking at economic performances and are not bogged down by political skirmishes.
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With most of the major corporate announcing their March quarter earnings what according to you were the key highlights?
Stocks that delivered higher profitability due to lower input costs on account of lower commodity prices had the best run up in the stock prices. However going forward, golden period seems likely to be over, as commodity prices have started to move up which will impact their margins and earnings.
On the other hand worst seems to be over for the commodity stocks as the prices of the primary commodities have risen smartly to materially alter the fortunes of the companies. Thus the key highlight for March quarter starkly contrasts each other.
The quarterly results of the first category of stocks mentioned above were outstanding but going forward the stock price may not perform, where as for the second category of stocks the results were worst nightmare in the history but going forward they look promising.
Select state-owned banks have reported massive losses on the back of higher provisioning for non-performing assets which are on the rise. What is your view on the same and which would be your top recommendations for long-term investment?
Every time a crisis has hit the market, it has only evolved and moved ahead. The bad loan crises, the legacy of the past seems likely to nearing an end. The enabling laws and RBI’s mandamus to clean up the system will sow the seed for better tomorrow in the lending and borrowing ecosystem in India.
Professionalization of the bank board will go a long way in instilling independence and confidence in the system to reignite growth in the PSU banking space. Still lot needs to be done and seen before investors can put in their hard earned money. However a basket approach should be adopted for investing in PSU banks once professional Boards are in place. Top picks would be SBI and BOB.
Recent reports from the MET department suggest delay in monsoons. Which sectors could see a major impact in case the progress of the monsoons is not in line with above normal forecasts?
Slight delay of a week or so is not going to make a big difference. Whether the monsoon turns out to be below normal would only be deduced at the fag end of the season. However we hope this monsoon season, Rain Gods will bless the county overwhelmingly. In the worst case scenario, if the monsoon delays or fails Agri inputs companies, rural focused NBFCs and two wheelers would be worst affected, no doubt the side effects will be felt across the sectors.
What is your take on the recently listed diagnostics companies such as Thyrocare and Dr Lal Path Labs and small finance bank licensees Equitas Holdings and Ujjivan Financial Services in terms of earnings growth potential going forward? What would be your call on these stocks at current levels?
Thyrocare and Dr Lal Path Labs are focused on Human diagnosis model which have huge potential. However rural India has huge growth potential to be captured, but that would render pressure on margins and ROE.
Considering valuation Thyrocare looks expensive at P/E of 69 with ROE of 19% but Dr LalPath Lab looks relatively better at P/E of 66 with ROE of 36%. Going forward staying invested in Dr LalPath would reward investors with inline market returns but Thyrocare would disappoint. In the micro finance space Ujjivan Financial and Equitas Holdings both have huge untapped markets to capture, they have teams and systems in place to carry forward the next level of growth in the prospering rural economy.
Although both are reasonably priced at 4.20 times last reported book value but considering the underlying growth potential investors should remain invested in both stocks for long term inflation adjusted returns.
Stocks of companies in industries such as chemicals, commodities and textiles have seen revival in fortunes and have posted healthy earnings. Is the growth trend likely to continue and which would be your top two picks in each of these industries?
In general one should avoid cyclical stocks and commoditized businesses. Cyclical including chemicals are fraught with the risk of timing and more often than not, investors don’t get it right in both, they enter at the top and exit at bottom thus incurring huge losses. At best they may offer a trading bet, stocks like Hindalco and Oil India looks promising in the commodity space.
However textile businesses are commoditized in nature and have low bargaining power with lower ROE, the exception could be companies having created brands. In this space Page Industries although available at slightly higher valuation looks promising for long term wealth creation perspective.
Apart from banks which are a proxy to the economy the health of the hospitality industry also indicates if the economy is on track. Are there any stocks that one can accumulate for the long-term?
Although hospitality sector will gain with the growth in the economy, but due to technology enabled aggregation business models emerging, the growth will get transmitted across the sector and will not be restricted to few premium players. That is why top listed companies have low ROE in single digit or are reporting losses. Typically the hospitality sector is asset heavy model, which poses lot of risks in itself in today’s digital world. Thus investors can skip the sector altogether from long term investment horizon, the sector is being disrupted by the likes of AIRBNB and OYO Rooms.
With the onset of monsoons from next month what impact do you see for stocks of cement companies in the near to medium term with construction activity taking a back seat?
Historically there is no correlation between monsoon season and adverse impact on the stock prices of the cement companies. At times, cement companies have raced ahead in the middle of the monsoon season and at other times have fallen too. As such the main driving force for the stock prices to rise or fall was the underlying bullish or bearish sentiments; rainy season is just a sentimental connection.
In the broader market, which would your top three stock recommendations whose valuations look attractive even at current levels?
Our top three picks would be Yes Bank, HDFC and Sun Pharma. Yes Bank is one of the fasted growing well managed private sector bank having efficient operations across all financial parameters. HDFC is poised to unlock value through its insurance arm IPO, which otherwise also is available at lower end of historic valuation leaving lot of margin of safety for conservative investors.
Pharma in general is going through a negative feedback loop of USFDA alerts, we believe this negative sentiment is a buying opportunity for long term value investors and Sun Pharma the leader in the sector will outperform the pack once the synergies of the Ranbaxy merger start unlocking from next few quarters. A proper mix of all three stocks would deliver far better risk adjusted returns in the long term.
