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    5 stocks Magadh Capital’s Vipul Prasad likes in bank, FMCG baskets

    Synopsis

    There is a cyclical dip after a 3-4-year period of good growth for auto companies, says Prasad.

    Vipul Prasad-Magadh Capital-1200
    HDFC Bank, Axis & SBI among banks and Dabur and Britannia are the top picks in banking and FMCG space, said Vipul Prasad, Founder & CEO, Magadh Capital LLP, in an interview with ET Now.

    Edited excerpts:

    Which are your favourites within the banking basket?

    HDFC Bank is at the top of the list but increasingly SBI and Axis Bank are the two names that we like quite a lot. As the process of NPA resolution under the NCLT process gains pace, we will see quite a significant improvement in the loan books of these two banks and apart from that, earnings will also get a lift because it would not just be a fall in provisioning, but it will also lead to some amount of write-backs occasionally.

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    On top of that, the kind of valuations that these two names are trading at indicate quite a bit of upside from here. One more thing worth highlighting is that both the companies had been going slow on corporate loan books because of obvious reasons. Their loan books had been in a very bad shape and so they were not chasing too much of credit growth.

    That is going to add a lot of visibility to their earnings in the times to come and on the retail side also, both the banks have been quite active, This kind of confidence that they are gaining on the capital structure should give a boost to that also. We are quite positive in these two names on an incremental basis and HDFC Bank has been a stock that we have been positive for quite a while.

    In that case, the story is quite simple that 18-20% loan book growth and NIM consistently at around 4% or higher and at the same time, valuation is on the higher side but they are able to justify that at least at the pace at which their earnings are growing, the stock will be able to grow.

    Where exactly are you finding value within the FMCG basket? A lot of experts are talking about how barring the valuations which are not compelling, the overall volume growth, the fundamentals do seem to be intact. Financials as well seem to be steady. What do you like within the FMCG basket?

    As a sector, this entire basket has done quite well and is largely driven by earnings and also by some re-rating also that has happened. That means the valuations do not look quite compelling but at the same time there are names like Britannia or Dabur, wherein you are getting very clear opportunities. Britannia is weak in the Hindi belt. If you go to some of the small towns in Hindi belt states, there will be renewed thrust from Britannia to be more visible on the shelves in the smaller towns.

    There the market shares have been very low. At the same time, Britannia has been doing quite well in terms of premiumisation of its product. They are doing all the things that are required not just to push up their top line at a decent pace but also to enhance their margins incrementally.

    This means I will be not be surprised if over the next three-four years, they are able to deliver in late teens in terms of earnings growth. That means the stock can continue to grow well, even if you assume that there is going to be some de-rating because the valuation multiples have come up to very high levels.

    Let us assume for a moment that there is minor derating, their stocks can continue to deliver 15-17% premium per annum. Similarly even in case of Dabur, in the last one-and-a-half to two years, it is apparent that they have managed to fight back the challenge from some ayurveda based challengers. They have done quite well on that front and also in other segments.

    Even in case of Dabur, the top line growth can comfortably be 13% to 15% largely driven by volumes. We like Dabur quite a lot. So these are the two stocks that we prefer in this space.

    Tomorrow again we are going to start off a brand new month and all the focus will be on motown as we are going to get the monthly sales data for February. Do you think it is going to be any different than last three months’ trend of a decline across segments?

    I do not really think so. This is a cyclical dip after a 3-4-year period of good growth for these companies. We are into a period of another two, three quarters before the volumes revive. But having said that, there is a clear growth path and we see very clear reasons why in two, three quarters from now, it should revive. I will be quite positive on the auto sector, not the entire sector, but some of the leaders in the space and more so if I can have patience around the sector.

    Given the uncertainty with regards to how this entire situation between may escalate from here, do you sense that that defensive tilt of the market may come back not in pharma, but maybe in IT where people are going to find safe haven?

    IT honestly has continued to surprise me positively and it has played its role as a defensive and a classic case where one can hide in terms of damage to the broader markets. But having said that, I would still think two things are worth highlighting here; one Indo-Pak standoff. I still think the base case should not be deep escalation and there is a possibility that over the next 10-15 days probably nothing happens incrementally and then we de-escalate.

    Let us say for a moment that there is another situation which has some decent probability although less probability than the first possibility that we talked about and in this case there is a low intensity conflict, but a very short lived one. In this case also, if the market comes down, it will be a V-shape kind of a recovery.

    Only the third situation wherein there is a proper escalation and a full-blown war are there deep problems for the market. In that case, defensives will get precedence over everything else.

    But I would still think that the base case should be that the first scenario that I talked about or the second scenario. And talking specifically about IT names, yes they have done very well and I would not be surprised if in the near term lets us say in the next at least three, four months they continue to do well. But let us not forget one thing that there are some signs of slowdown in the western economies which means at some point in time, the business of these companies may also slowdown.

    In any case, they had not been delivering 25% kind of earnings growth. It was more like teen earnings growth and all along as they have outperformed the market, their valuation multiples have got quite elevated.

    What are you expecting from the Zee deal? Buzz on the street is that the strategic stake sale could culminate soon. There are just two players now in the fray and we could see quite a bit of upside on the stock, what is your call?

    In these situations, it becomes more of a binary call. I have been staying away from this. But yes, if they are able to get a good buyer with a good name and with good deep pockets, then it will be a very good thing for the company and at the same time for the shareholders also.

    But for me some concerns for some time has been that this is a very disruption prone industry and on top of that, if you are commanding the kind of valuations that Zee had been commanding about an year ago, t is not a very good recipe for an investor.

    Also, after Zee announced that they are going to sell out, then also I was a bit disappointed in the sense that Zee was one company that had done phenomenally well. It was one of the poster boys of the media sector. They had held on to their own despite big challenges coming in.

    When they decided to throw in the towel, it did come as a surprise. Then obviously it came out later that there were other reasons also. But coming back to your question directly, yes it will be more like a binary outcome and so for me, it is a no. I will not be interested in this stock.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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