If the Nifty has to go up further, what would be your top three buys?
2021 is going to be a really good year. This is the time to look for stocks with accelerating business momentum — be it both auto, auto ancillaries, consumer discretionary or banks. Take a company like a JK Tyre for example. It has a couple of things going for it. One, the company has regained its business momentum. There is an expectation that commercial vehicles will do well. Second, the company is deleveraging and that is good for fundamentals. Third, the company is trading at about 6-7 times earnings. It is probably the cheapest stock in the tyre segment. If you add up, there is a significant amount of upside.
Second, if you look at say Federal Bank, it is trading at about 0.6-0.7 times price to book on FY22 and then it trades normally at about 1.2. They have cleaned up their book quite well. The provisioning is quite good. And with Covid hopefully coming to an end, banks will be able to price their peak provisioning for bad loans with far greater clarity. If that happens, there is a fair amount of upside for Federal Bank.
Third, among consumer discretionaries, take Crompton Greaves. It is a company which has lots of low priced consumer durable products. It is less expensive than other high priced consumer durable companies.
What would be your advice on Eicher Motors?
Eicher Motors is well placed as it is an aspirational bike. It is a company which has had a very strong brand recall. Lately, they have been doing more of the good things in terms of their product positioning and the right kind of movies so that there is a greater brand and aspirational recall. On the other hand, they are at a price point where one step higher and they will start competing with Triumphs and the Harley Davidsons of the world. A few points lower and there are Bajaj and the Hero Motor.
It is that particular niche segment on which they can focus. They would probably find it tougher to move up the price point with new additional luxury models, because their competitors are the Triumphs and the Harley Davidsons of the world. But if they expand in this niche segment across other countries, a growth path is still ahead of them. Given that sales have not been that strong for the last couple of years, with the economy emerging out of the Covid lockdown, some amount of demand loss will come back.
Where are you being an opportunist in this market? Where are you taking some chips off the table with an assumption that when a shakeout happens, you will buy the same stock 10-15% lower?
There are two, three things that we are looking at; one is business momentum of the company, not the stock price momentum. If business momentum is coming back on an accelerated basis, it should show up in terms of revenue growth. So, is the company being able to grow its revenue faster than that of its competition?
Second, we have to see if financials are improving and whether they are deleveraging so that the balance sheet and P&L are becoming stronger.
Third, if these two factors are in place then your stock market returns will happen as a consequence. Against that context, I am looking at growth companies. Take JK Tyre or Crompton Consumer or even a company like Cholamandalam Finance. These are companies which are trading well below their median multiples. Their loan growth rate is going to surprise on the upside. I can bet my bottom dollar that in the next couple of quarters, analysts will move up the numbers, not just for these companies but across sectors.
We have upward earnings revisions in companies that will benefit the most and that will be first in consumer and second in banking. When I say consumer, it also includes auto and the consumer durables and people have realised that protection for them. Security is an important thing. People will now start looking and because interest rates are low, they will now buy that apartment or car or bike. Those are the areas which will come back very fast and that is where we are focussing.
Anything in the cyclical trade which could be called comeback trade for this winter? Where would you say I am buying momentum, I am not buying fundamentals, I am simply betting on price more than anything else?
You will find some names in banking. We have mentioned Federal Bank. Second, for a trade, PSU banks are okay. Take a bank like Canara Bank, it trades at about 0.3 times book. It is raising capital and now it has a good business momentum which can translate into a price momentum for a good 15-20% upside from the current levels.
Union Bank is another bank which is trading at a similar valuation. Its fundamentals are improving and translating into price momentum and these have been laggards, not just in the last six, eight months but laggards over the last couple of years. But now with peak provision in sight, some of the PSU banks like Canara Bank and Union Bank are also looking like good positional trades.
Would you be a buyer in any of the capital goods names?
Bharat Electronics is a good candidate. It is a media shy company and does not talk. Recently they had an analyst meet and they reiterated some goals. Defence is an important agenda for the government. The company in itself stock price has not really done much, it has done in line with the market maybe at best and so its earnings are going to grow at least 18-20% with visibility, ROEs at about 20%, stock trades at about 12-13 times. It has enough price momentum left in it for it to outperform from the current levels for another 20-25% odd.