Sanjiv Bhasin, Director, IIFL Securities, says “artificial corrections never last too long, but they are painful. In bull markets, the retracement is sharper. The Dow, the Nasdaq, the S&P, the Japanese Nikkei, all are in upward momentum. It is about time India started to smell the coffee and we think that the result season will bode extremely well.”
Bhasin further says “as we get more clarity on elections and so on, we should see one more rally coming before the election. I am very positive on some of the midcaps, particularly PSUs. I have been bullish across the board on oil marketing companies, on REC, PFC, some of the banks.”
There has been so much of hue and cry about impending correction and what we got was just 10% off from the recent top on midcaps and smallcaps. Between March 14 and now, which is a week, we have clawed back more than half of it, especially non-banking PSUs. Was it over before it even began?Sanjiv Bhasin: That is what typical bull markets are. You can keep feeling fear when the markets correct. But they had reached zones where there was an overbought reading on a lot of stocks and the SEBI diktat, the overall play on stress test on mutual funds, all that meant that an artificial correction took place. Artificial corrections never last too long, but they are painful. In bull markets, the retracement is sharper than you think. And we live in strange times, the Dow, the Nasdaq, the S&P, the Japanese Nikkei, all are in upward momentum. New highs are across the board. So, I think that it is about time India started to smell the coffee and we think that the result season will bode extremely well.
Now, everything is on earnings and short-term micro, but the economy as such is doing very well. As we get more clarity on elections and so on, we should see one more rally coming before the election. I am very positive on some of the midcaps, particularly PSUs. I have been bullish across the board on oil marketing companies, on REC, PFC, some of the banks. In a bank like Union Bank, I think the numbers will be a standout. We had a buy on this closer to Rs 55, 57 and then Rs 100, 140. I still think Union Bank is headed to Rs 200.
Selectively, stocks are going to do extremely well. Cement, gold lenders, REC, PFC, midcap banks and the broader market will again start to do well, but it is going to be the Nifty which can actually spearhead on the back of Bank Nifty which I think can be a huge outperformer. Falling yields and lower inflation bode well both for the indices and for the banks.
Coming to Reliance Industries, the analysts’ view is that the earnings downgrade cycle is likely ending and this $10-billion debt reduction is going to be quite critical. At Rs 2,900 levels, what is the view?
Sanjiv Bhasin: Reliance has been a bellwether, now we know that on the added front, the new entrants into their new verticals, all are going to be capital intensive, OTC has started to generate cash, but still there will be talk of how they can sell extra stake and so on.
However, Reliance has been the pillar of the index taking it to new highs. We still think that banks are now going to add up, HDFC Bank could regain its momentum. Most of the bad news is in there. At two-time price to book, it is a very good time. But we still think Reliance is headed higher. Sum of parts is Rs 21 lakh crore market cap. Over a period of time, Rs 25 lakh crore could be very much on the cards somewhere during this year.
What is the outlook when it comes to the consumption basket? Where are you finding preference? We have spoken about a lot of those QSR plays. Would it extend to some new-age tech as well?
Sanjiv Bhasin: Correct. Zomato has been the star over there. PB Fintech has done extremely well. Devyani is an outlier. It will be over a period of time. As the spending patterns in rural India start to pick up, what has happened is there is replacement taking place in the basket from Pizza Hut, more preference against Domino’s and that constant change of preferences will see some more market cap being added to Devyani.
We also like, based on the rise in rural income, Bata and Patanjali. In fact, Patanjali is gaining more and more traction in anything to do with the food after the acquisition of Ruchi Foods. We like Godrej Consumer and also Nestle as a top line Nifty component. But ITC could be a dark horse, given that the overhang of BAT selling its stake now means that over a period of time, there could be a demerger of the cigarette business which will be really value accretive.
ITC used to be in the low-single digits as far as margins go on their FMCG business, which has now expanded dramatically and that could be a real money churner over a period of time. So, ITC is a dark horse on the FMCG basket and that could be a good play given that now we could look at the demerger of the cigarette business over a period of time.
Have you been tracking Reliance Power? It has been locked in the upper circuit for three consecutive days now.
Sanjiv Bhasin: Well, as a disclosure, we owned Reliance Power from that Rs 3.5-4 and Reliance Infra closer to Rs 85. That was a punt taken on the sheer market cap discount which it was giving. The stock has seen that Anil Ambani is in the process of reducing debt, paying back lenders. All that bodes well for this entity. It was generating 4,000 megawatts, but the debt burden was a huge overhang on it. As the process of power being an outlier has been there, all power companies have started to show positive EBITDA over a period of time, particularly the one which were servicing high debt and if power remains in this surplus generation where IRRs have improved, then that could be a real outbundling for them.
But, like I said, we bought it when it was maybe one-tenth the price it was when it was a throwaway asset. Right now, there is a little bit of frenzy and ownership of power assets because they have been the best performing asset class in the last two years.
Some interesting brokerages have trickled in this morning. Goldman Sachs has come out with their latest report on the footwear industry, Metro Brands, Bata. They have initiated a buy and a neutral rating respectively there. CLSA has said that there is a sharp downward revision guidance in IT, which implies that there is going to be no major pickup in the second half and they are cautious as a whole on the sector. What is your stance on space?
Sanjiv Bhasin: Bata has been our top pick. In IT, we still think Wipro and HCL Tech will stand out in the largecaps. There could be a little bit of to and fro on margins, but overall the environment in the US is turning positive, which means if yields fall, inflation threat lowers, and if there is a rate cut, then that means attrition overall will be very positive and we have seen the transition into cloud computing, into AI, and each largecap now has separate verticals for that.
HCL Tech and Wipro are two of our favourites, which can be added on to all declines. Bata, for us, could be an outlier, purely because of branded footwear and migration from Campus to smaller tier II, tier III to Bata and their contract manufacturing vertically they are doing extremely well. As a disclosure, all these three stocks are in our portfolio.
