Buy Hindalco and JSPL on dips, raise exposure in IT: Hemang Jani

People would be interested in the companies in the two-wheeler space or tractors or for that matter some of the consumer and agrochemical space, says the Equity Strategist & Senior Group VP, MOFSL

On HCL Technologies
The entire tech sector and particularly HCL Tech is doing exceptionally well and we had a couple of developments before moving into the earning season. The company said that their overall growth in Q2 would be much better than what the earlier guidance was and the company also did the acquisition of an Australian company and more importantly, going by the kind of indications that we have from the entire tech sector in terms of the outlook for next year and overall IT tech spend, things are looking very positive.

We think that all the players will benefit because of this and more so a player like HCL Tech which is relatively cheaper and is growing at a better rate than some of the other players. HCL Tech should be one of the top picks in the technology space. Even from a quarterly numbers perspective, we continue to believe that the company would surprise positively both in terms of revenue and net profit. We have a very strong positive bias towards HCL Tech.

On gold financiers
The gold financiers had been doing well till let us say a couple of months earlier and post this news of the RBI giving slightly better terms to the banks in terms of loan to value, there has been some sort of correction. Though the effect of that move will not be much, but in the current environment, the kind of growth that they have delivered one is really not sure about the kind of growth we are going to see at least in the next couple of quarters since there is a bit of a slowdown in the entire financial services and the NBFC space is cooling off. For now, we would stay away from it. Within the gold financiers, we have a coverage on Muthoot Finance and we would wait for a better entry point at this point of time.

On auto sector
The auto sector because of the last two or three monthly numbers was doing pretty well. But as we move into this festive season, we are not sure how the season will be in terms of the actual growth. We should actually wait for a couple of months’ numbers particularly this festive season before taking a broader call. We are of the view that auto as a space has done its course and it is time to wait and watch. Of course, two-wheelers and the rural story in the overall scheme of things will continue to be strong but it needs to be validated by the actual growth at the ground level.

On metal pack
In the last few days, we have seen a sharp correction across the metal names - be it Tata Steel or JSPL and even non-ferrous companies like Hindalco. We feel that given the recent data points which have come out from China, there might be a bit of a slowdown in the entire price rise that we had seen. For JSPL there was specific news relating to the environment clearance for one of their mines. In the overall scheme of things, we continue to like Hindalco because Novelis accounts for only about 15-20% of their operating profit that comes from Europe where there is a second wave of Covid-19. But they are extremely well positioned in terms of their overall operations. So both Hindalco and JSPL can be bought on dips as their overall story continues to remain good.

On smallcaps
Hemang Jani: We have come out with certain smallcap picks very recently. One of those is the Energy Exchange which is quoted at about Rs 195. It is in distribution cum power trading and this looks to be a very interesting smallcap pick.

Apart from that, Essel Propack is something that we like where a deal has happened recently and on a B2B business the company is doing well.

Some of the midcap cement companies like Birla Corp, JK Cement are well placed in the current environment. Though there has been a correction in the market and that may affect the sentiment towards the smallcap stocks, at some point at a good correction it would make sense to really buy into them because overall the revenue visibility and the growth prospects are good for these names.

On Nifty Bank
The entire sector banking and financial services is underperforming because people are worried about the quarterly numbers. So far all the bank managements have told us that the moratorium book is okay, about 10-12-15% of the total and now growth rates are coming back. But we will have greater clarity about the credit cost and the real moratorium numbers when we see the actual numbers. There might be some case of disappointment for a large number of banks. We really need to wait and see how things are shaping up before we move into any of the unknown names. People want to play safe and so either HDFC Bank or some of the top notch banks are increasing their allocation to IT and pharma and other sectors to play safe in the current environment.

On telecom sector
Hemang Jani: If you look at the plans, the entire focus is on increasing their postpaid customer base because Jio has a very small component of the postpaid base and what they are just trying to do is to have some add on services.
In terms of the price, most of the plans are very similar but they are trying to offer some OTT based offerings to make it more lucrative. So on the face of it, Jio plans may look a bit disruptive but the way I look at is that the entire market is going to expand to 4G where the ARPU growth can be very good. We may have to wait to see the actual ARPU increase but if the market itself expands by some counter offering by the incumbents, it is good for the industry.

On rural theme for investment
I definitely think this is one bright spot for our economy because of the better monsoon and relatively less impact of Covid, people are expecting a better growth rate. When one interacts with the managements of HUL or auto companies, that particular message is coming out very clearly. People would be interested in the companies in the two-wheeler space or tractors or for that matter some of the consumer and agrochemical space. One does not know in the next say one quarter how things are going to pan out for the urban related sectors.

On justified PE multiples for TCS and other IT stocks
Currently, TCS would be quoting at about 23-24 times FY22 and the rest of the companies would be somewhere in the range of 18-20. Infosys and HCL Tech are a bit lower. The most important thing is that IT as a sector is under owned and this is where we are looking at material upgrades coming through in the second quarter. With the indications coming from the US in terms of tech spend etc, people would definitely want to own IT versus some of the other domestic oriented sectors, where you do not know how things are going to pan out over the next one or two quarters.

One should definitely have more exposure to IT compared to may something like retail space or even auto space, where you do not know how things are going to pan out, particularly banking and financial related weightage, which could go to IT and some of the defensive sectors at this point of time.