sortiwa
[ad_1]
Yes, so what we are seeing is a significant risk aversion on the part of the banks especially and the various measures that the RBI had taken as far as providing liquidity to the NBFC sector is concerned through the repo operations; those have not been taken very positively by the banks and we believe that definitely there could be some impact.
Now there are various NBFCs; some of them are backed by parent; for example, the M&M Financial or Chola Financial are very strong NBFCs and we believe that these NBFCs could be able to ride through this phase and the valuations have also become attractive, not from FY21 perspective but from FY22 side.
So I think these NBFCs like Chola or Shriram Transport Finance Company (STFC) are trading at around 0.6-0.7 times price to book value and definitely they look attractive from a valuation perspective. But in the near term, there could definitely be an impact. Because of what is happening, they are not being able to refinance and the liquidity pressure will definitely be there but these are strong NBFCs and they have seen these kinds of cycles in the past also. We believe that they should be able to come out with these times.
On pharmaceutical though, do you think one has missed the bus when it comes to any of these pharma names?How convinced are you really about the move on pharmaceuticals at large because while most believe that there is value in the sector, some are even saying that it is a trading move and it is only as good as it lasts?
So the pharma sector had been underperforming over the last three-four years but in recent times, it has started to come back into flavour. The sector had been to some extent punished because of the regulatory actions by the FDA on the manufacturing front. Also, there was continued pricing pressure on the generic drugs in the PE market of the US. So now we are seeing that even on the pricing front in the US market, it has kind of got bottomed out and recently we saw a lot of FDA approvals coming through for various pharmaceutical companies; like we saw in the case of Aurobindo just a few days back and the stock got a boost.
At the same time, the valuations have also become quite reasonable for the sector. So it is a combination of these factors that we are seeing that it is a defensive sector and if you compare it with another defensive sector, for example, consumer staples, then there is a huge valuation mismatch between the pharma sector and the FMCG sector. So there is some upside on the valuation front and there is some positive news flow coming from the FDA; all this is contributing to the up move that we are seeing in the pharma sector.
Your perspective on L&T in particular as well as some of the other possible construction names that are also getting back to work?
Yes, so L&T has got. It was a good quarter for L&T so far as the order intake is concerned. But definitely, there will be challenges. So we are not really getting extrapolating performance in April into the first half of the current fiscal simply because the corporate sector is not in a position to invest and the focus of the government will be more on supporting the weaker section of the society rather than driving infrastructure investments. So we believe that the first half of current fiscal in terms of order intake could be very tricky.
Having said that, what we have been seeing in Larsen & Toubro was that although the tailwinds from the investment side were not there, the macro slowdown was there but the valuation was to some extent premium before the fall. Now the valuations have also become quite attractive and for a company of the size of Larsen & Toubro and the kind of preferability on the execution side it has, we believe the current valuation is definitely attractive.
But we will have to look at FY22 numbers and not FY21 numbers and from that perspective definitely, L&T looks good. The other two stocks in the construction space that we like are KNR Infrastructure and PNC Infrastructure. Now in case of PNC, we have seen that the company has reported very good numbers in the first nine months and it has also won major orders in the month of February. So it is also very well-positioned on the order book front and we believe the valuations are also now quite attractive. So these are the three stocks that we like: L&T, KNR Construction and PNC.
What is your take on the IT names? While perhaps the commentary has been as expected and not disastrous but in terms of expectations, there are some serious question marks being raised as to how the industry will be bit? What are you making of some of these trends?
So far as the IT companies are concerned, we saw was that the revenue growths of the frontline names were to some extent impacted because of the execution issues, especially in the month of March and there was a mixed performance on the EBITDA front and free cash flow generation was good; both at TCS as well as Infosys.
However, the major question is regarding the future deal flow. So most probably, what we will be seeing is that clients will be cutting budgets, there will be reduction on discretionary spending, there will be pressure on IT companies to reduce billing rates and there could also be some execution issues partly because of work from home and some travel restrictions.
In addition to that, there are various verticals like BFSI, auto and retail who are the major demand drivers for the IT companies and here also, there could be some slowdown that we will see on the deal front. So this year again, one should not look at FY21 because in all probability, there could be some de-growth that we will see in the IT companies. But my sense is, towards the second half of the current fiscal, the global economy will start finding its feet. So we should look at FY22 numbers and to that extent we believe that the sector is quite reasonably valued. While Infosys has recovered a lot of its ground, there are other names where the valuation is at a discount to Infosys; so we like HCL Tech or a MindTree from that perspective.
The one other pocket which everyone has been talking about is the crude sensitives and the beneficiary from the crude crash; for instance, paint companies fundamentally do stand to benefit from the crude cool off but given that the slowdown is prevalent and is going to be much long lasting post COVID, there is a big question mark on their sales and volumes. How would you approach paints?
So definitely, paint companies will be beneficiaries from the cost perspective but the way the slowdown has started to happen and individuals as well as households kind of postponing discretionary spending probably; that might include painting as well. So we might have a slowdown on the demand side on the volumes front.
While there will be some benefit coming from the cost angle, it could to some extent get offset because of the negative operating leverage that will happen because the revenue growth would slow down or it might even contract in the first half of the current fiscal. In addition to that, the sector remains very richly valued; so companies like Asian Paints and Kansai Nerolac are trading at PEs of 50 one year forward valuation. So from that perspective also, there is not much of a bargain available in the sector. So probably, we will have to look at smaller names in the paints sector where the valuation is also reasonable and which could improve the market share and also benefit from the commodities front.
But at the moment, we are not finding very good value bargains in the paints sector. Rather, maybe you could look at the gas utilities or lubricants to really benefit from the reduction in oil prices. So on that front, Castrol kind of looks good. The gas utilities if the gas prices continue to go down could be beneficiaries; so in that, Mahanagar Gas could be one of them. So one can play that.
While we continue to await a package, the latest we are hearing is that perhaps the MSME one is close to approval. On the other hand, we are also weighing it up against the fact that we may actually see a further extension of the lockdown or at least a partial lockdown. Given some of these factors at play, how would you position yourself or give advice to investors as we head into a fresh week?
If we look at the levels of the market on FY21, basis it is trading at around 16 times and FY22, it is trading at around 12.5 times. So valuations on FY22 basis is attractive. And the other factor that we are also looking at is the earnings yield. Now the earnings yield as well as the bond yields are more or less at the same level, which is a very key precursor so far as undervaluation in the market is concerned.
Now sector-wise right now, you got to look at sectors like IT or the private sector banks and select NBFCs. Within that maybe the gold lending NBFCs could be better positioned at this point of time as compared to the microfinance NBFCs. The other part of the sector is that it is still early to really take a view on various sectors because we do not know how long the lockdown will continue. So we will look at the quarterly numbers which will get announced and we will kind of hear from the management what their take would be and how they plan to cope up with the various scenarios. Maybe we’ll look at the base case, the optimistic case and the worst case scenarios as far as the lockdown is concerned and maybe then we can position it.
But if you ask me from a market perspective whether it is the right time to buy, whether I should be suggesting investors, I believe that in the near term, there is not much of an upside because we will be in a very rangebound kind of play. So any decline from here on we believe that then the investors can really look at buying and he should keep more cash when the market goes to around 33000-34000; the Sensex level.
[ad_2]
Source link
