Even though valuations are attractive, Pankaj Pandey, Head of Research, ICICI Direct advices investors to stick to those sectors that provide both value as well as growth.
According to him, many stocks are currently trading lower than book value.
"The opportunity will come in terms of buying these stocks and keeping it for slightly longer, two-three year kind of horizon wherein these stocks can give potentially far better returns in the overall market" he tells CNBC-TV 18.
Below is a verbatim transcript of his interview with CNBC-TV 18's Latha Venkatesh and Sonia Shenoy. Also watch the accompanying video.
Q: You think now, prices are looking like they have all the bad news in the price, and people will start picking up at this point in time?
A: For Sensex our target is 16,924 which is 14 times FY12 EPS of 1209. So from valuation perspective, things are quite comfortable and are attractive. However, in terms of our approach, we are looking at sectors wherein we get both value as well as growth.
So from that perspective, we like sectors like IT, pharma and banking. This has been our stance since the beginning of the year. The capital sensitive and interest rate oriented sectors and as well as midcaps and smallcaps, we feel that there might be some bit of more pain because the expectations on interest rate and inflation is yet to peak out. So once that happens, whether it happens in one-two quarters down the line, that is where we look at these segments into market also.
But as of now we are chasing growth and not value from overall market perspective.
Q: One can’t time how much more of a downside many of these rate sensitive will see. So on the back of the selloff would you buy into any of the infrastructure stocks? Some of them have reached valuations like its nobody’s business. GVK Power is now at Rs 18; Lanco Infra is fallen more than 60% in the last month or so. Would you buy any of these stocks in the infra space?
A: For infrastructure space, we expect that there will be some bit of more pain left going forward and probably one-two quarters of bad numbers are yet to come. But then again, if you look at from the valuation perspective, some of the stocks are trading below book value and probably numbers will not be good because of lot of companies might do some contracting work where the margins could be even less. And also probably some of them will have to slowdown their pace of execution because that will attract higher working capital.
So given that the numbers will be bad, but that is where we would expect the opportunity will come in terms of buying these stocks and keeping it for slightly longer, two-three year kind of horizon wherein these stocks can give potentially far better returns in the overall market.
Q: The markets tanked with four of its major supporters simply throwing in the towel during the results and that was SBI , Infosys , ONGC and Reliance . Do you think these stocks themselves have reached levels where it would be time to pick them up anyway?
A: From portfolio creation perspective, we believe that this is the best time to really start or do a lump sum kind of investing, because if somebody undertakes that activity and continues it for a period of 6-10 months or probably more than a year, I think the average cost of regulation for all these stocks is going to be pretty good. And if somebody is holding it for a longer period of time, they can definitely generate far better wealth.
In terms of sectors probably IT, we have been positive on TCS and HCL Tech and Infosys post correction after Q4 results. We have recommended our clients to buy because we feel that the company would still offer growth. And IT per se has never been cheap compare to the overall market, but we feel that the growth is still there and probably these would be the initial beneficiaries if there is reversal in the market fortunes.
Q: What about in the broader markets? Just like you outlined a couple of these stocks from the frontliners, can you give us some good buy ideas in the broader markets as well?
A: Largely we have been recommending largecaps only, for example, in IT as I said TCS, HCL Tech and Infosys post correction is what we are liking now and we don’t see any change in that.
On the banking side, we feel that the banking sector despite higher base can still deliver about 20% kind of a bottomline growth, because of the growth which will be led by purely inline with NII kind of growth. So given that we are positive on SBI even post corrections and HDFC Bank and Axis Bank is what we would like in largecaps.
On the midcap side we like Yes Bank , Oriental Bank of Commerce and Federal Bank . On the pharma side Lupin is what we prefer among largecaps with a target price of Rs 530, and on the midcap side we like Biocon and Glenmark .
Q: I wanted to just ask you about one stock S Kumars in particular, if you have a call on that one. At the start of the year S Kumars was somewhere around Rs 90 or so, and now its come all the way down to Rs 50. Would you buy it at this level or would you stay away?
A: Midcaps in general, we have seen that the confidence is too fragile in midcaps. So whether it is any sort of a bad news or any sort of company specific news has impacted or has created sharp cuts in the stocks.
For S Kumars in particular, we don’t have coverage, but midcaps we feel that people can look at from a three year plus perspective because all these stocks, midcaps in general, offer good value. But we don’t expect it to be played out in the medium-term. So probably longer-term perspective is what one can look at. By that time the growth will also return in these stocks.
Disclosure: It is safer to assume that I and my clients would be holding positions into the stocks which we have talked about today.
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steven
management trainee-fundamental analysis
DENIP consultants Pvt Ltd
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