/Pharma had its run, start picking up cyclicals: Ajay Bagga

Pharma had its run, start picking up cyclicals: Ajay Bagga

Our fundamental thesis is for a robust recovery in the global economy over the next one year, whereby cyclicals will perform well. We would be very interested in base metals, materials and cement stocks, says the market expert.

A big uncertainty was lifted with the Supreme Court verdict on the AGR dues and there was a big relief for Bharti as a period of ten years has been given for paying up AGR dues.
Yes definitely and they have paid a large portion already and secondly they have created a war chest by raising equity. We feel there will be follow-on increases in the ARPUs. There will be a pricing change and that will help the bottom line. So a good outcome for Bharti and they have been rewarded for the way that they took action early in raising equity and bringing in more funds.

Now, once their foreign ownership is cleared, you could see further flows coming into the stock as well because of 100% allowance for FDI. Once that gets approved, you could see more money coming in in terms of foreign investors getting interested. It is an India consumption play. It is becoming more of a duopoly now between Jio and Airtel and the pricing power will come back to the industry. The industry appears to be on the cusp of a turnaround in terms of the bottom line and margins improving.

What is catching your eye in the pharma basket?
Pharma outperformed over the last six months and there was some concern on a lot of the growth having been baked into the valuations already. The second thing was that on the back of expectation of a robust recovery six months to a year down the line, cyclicals were coming back into favour. We saw auto and metals moving up.

We saw cement getting boosted and after some correction, we are seeing a pick up in pharma again. But I would keep it very diversified, pharma has had its run. There are still good growth momentum stocks in pharma but it is time also to start picking at some cyclicals, especially metals, given the kind of numbers coming out of China which is the biggest consumer of the metal pack. You will see metals performing. Overall given the amount of liquidity that has been pumped into the global economy, our fundamental thesis is for a robust recovery in the global economy over the next one year, whereby cyclicals will tend to perform well. So we would be very interested in base metals, materials and cement stocks.

We are seeing a turnaround finally coming in auto. Consider auto from a two-year basis. This is a good entry point into the Indian auto pack. Two-wheelers will recover faster than passenger vehicles. Commercial vehicles will lag because of the overcapacity and because of various other funding issues that are there but eventually commercial vehicles will catch up. There is more of a coincidental kind of volume that we will see in commercial vehicles but the leading indicators on two-wheelers and passenger vehicles are pretty good and they are showing that we might have a robust recovery coming our way over the next six months to a year.

Would you say that you are a little more comfortable in buying banks, at least the top tier names?
Yes definitely and the main thing will be that restructuring has been put on the table by the central bank. So you will see a lot of the problem accounts getting restructured. So that Rs 10 lakh crore addition into the NPAs is not happening and this will give both banks and those clients time for the economic recovery to kick in and for them to be able to service their loans. The restructuring will help banks a lot.

For NBFCs, there is trouble, especially in the developer loans. We are foreseeing quite a bit of trouble there and the government has come in with a fund which is helping stalled projects. Those kinds of initiatives will need to be taken to bail out stuck projects and the developer loans funding them. Banks do not have that much exposure to that segment per se. There is exposure in gems, jewellery, in hotels, restaurants all those will see a fair bit of problems.

Coming to SME loans, banks have been very quick to move a lot of the loans into the three lakh crore government kitty. Nearly Rs 180,000 crore have been moved into that. I am expecting the top quality banks to really outperform. We have to be careful in choosing the stocks. I would stick with the leaders, the top two-three on the private side. On the public sector banks, there is a turnaround story but still I would prefer the private sector banks. The chance of getting good returns are much better there than the public sector banks for now.

Which would be your top midcap IT bets?
I would not like to give a particular stock but there are at least four to five names in midcap IT which are looking very exciting. Overall, if you see the big difference this time around one, the business models have been rejigged to the digitisation to the Cloud computing part. There is practically a wave of outsourcing coming the way of our IT companies and the midcap IT companies have a good niche offering. Most of these players will be able to take these orders even at a lower margin than the large cap IT.

But for me, midcap IT first and then the large cap guys. There is enough opportunity even within the large cap IT players in India. The rupee-dollar is a worry and RBI allowing the rupee to appreciate has taken the market by some surprise. There will be a little bit of earnings impact due to rupee appreciation over the past month or so. There has been a nearly 2% rise in the rupee. That is negative for the sector but overall, the IT spend globally is going down 4% this year but you are talking of a few trillion dollars and our market shares are not that huge in the overall scheme of things. So there is a huge market and very high margin, low cost players with very good services and business models are being rejigged. These are some of the drivers working for the midcap IT. I would say definitely worth a look.

What is your take on L&T? What is the long-term outlook there?
It is the biggest player, the best professionally run infra player in India. There were some downsides; one was obviously the leverage and the stalling of projects, both in the Middle East as well as the Hyderabad Metro causing some concerns. The Schneider sale generates more liquidity. It has been in the works for a long time. It has taken nearly 24 months to fructify but overall it brings in about Rs 10,000 crore on to the cash books. It is very positive in that sense.

L&T will be a good proxy on the infra push which is inevitable. It will start with the government and then the private sector will take over maybe four quarters more down the line. We are expecting the government push in the next six months.

Overall, it is a very well run company with a very professional management and the scale is there, right from defence to EPC to various other segments that they have. We are also expecting some disinvestment on the financials part. So, a back to core kind of move might be there to consolidate. That would also be positive and worth looking at. I am not giving a buy or sell but definitely it is a market leader in this segment.

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