Get set for a bottoms-up market in first half of FY25: Amit Khurana

Amit Khurana, Head of Equities, Dolat Capital, says for the next few months, bottoms-up stock picking should be the preferred mode and look out for names either showing signs of turnaround or names which have visibility even though you may have to pay a little bit of a premium on the valuation side, but the momentum continues to be supportive for those sectors or stocks.

You were slightly cautious on the market and by mid of March that caution played out, however, it was short-lived and the market rebounded. What is your current prognosis of the way the earnings season is panning out? Did you request the clients to buy that dip or are they still sitting on the sides?
Amit Khurana: Yes, the correction did play out which we were anticipating but the depth of it and the breadth, I did not come as much as one would have wished for. I know the valuation is more attractive, but this is classical markets which every dip gets bought into. Now, the earning season has not really started on a strong note because most of the numbers do not suggest a very strong performance either for Q4 but even from the commentary perspective, I would probably call it mixed. It is not negative but it is not definitely something which can lead to an earnings uptick whether you look at IT services or some of the financials which have reported results.

There are small tweaks that you are doing here and there but nothing directionally which leads us to an upgrade of the view on the market per se. So, in that environment, how do you navigate the next few months? Our take continues to be bottoms-up stock picking as a preferred mode and look out for names either showing signs of turnaround or names which have visibility even though you may have to pay a little bit of a premium on the valuation side, but then the momentum continues to be supportive for those sectors or stocks, continue to back up those.

This is a very divergent market which tends to give much, much higher premium multiples for names which are performing and tends to beat down sometimes unfavourably, names which are not showing the desired numbers or the growth pattern. So, largely a bottoms-up market is what our take is for the first half of this financial year and we stick to that view as of now.

What is your view on these battery companies because they have seen a solid run in the last one month?
Amit Khurana: If you look at the slightly longer-term timeframe, they have outperformed the pack, the sector, the market by a very wide margin. I think part of that was of course the tailwind trade that we got to see when the raw material cost normalised and then of course, there was the follow-through demand playing out well and now you have the new battery storage as one of the drivers of the valuation.

Structurally these companies will benefit from these new businesses which are emerging but the discounting of those as of now seems pretty well in valuation terms. In fact, from the overall auto ancillary perspective, we believe the manufacturing, the other segment for OEMs is better placed versus the battery as of now.

How to navigate within the IT pack right now? Sure enough, the commentary from the big boys continues to be still elusive and pretty unclear but that is not quite the case with Tech M, for instance. They are talking about FY27 projections without a clear roadmap. Would you say that other than Tech M, this could perhaps prompt you to start nibbling into a completely unloved under-owned sector right now?
Amit Khurana: It is not unloved really because the midcaps have been performing reasonably well and that is where our concern is, that the PEG multiples that you are paying for some of these franchises are pretty rich. Our take has been that even if one has to play on IT, one plays on the largecaps and that is very stock specific.

For example, HCL Technologies is one of the names that we have liked, that has done reasonably well. Midcap our concern still is that even for a 10% or even low double digit growth visibility you are paying 30-32 times, 35 times which does not really seem to be very, very attractive to us. Now, let us not forget that the environment will probably worsen over the next couple of quarters. This is what the commentary seems to suggest.

How will these midcap companies navigate? Our take on IT has been very specific on the stock side. In fact, rather than play the IT, we played more of the digital side of the themes wherein some of the domestic digital themes have played out much better if one were to expand IT into a larger basket. But pure IT services, we are avoiding midcaps very clearly and preferring largecaps on a stock specific basis.

Mid and smallcap shake off which transpired in March started with the overheated railway names and some of the defence names as well. Where some of the weaker hands got shaken off and now again, they have more than recovered all of their March losses. Do you continue to be constructive in the long haul on railway and defence names.
Amit Khurana: The story does not change in the longer term. Essentially, the market tends to sort of give too much of a premium multiples in the near term that has its own way to correct either in terms of time corrections or in terms of price corrections, ideally a combination of both. Structurally speaking, the overall view continues to be extremely positive on domestic capex stories and the spenders so to say because the kind of support that we would be expecting hopefully when the new government takes office, whether it is a current ruling coalition which comes back or whosoever comes back eventually.

But the momentum for some of these businesses remains very much in place. Remember one very important part is that the balance sheets are much stronger than what was the case a few years back and that is very supportive with the valuations continuing to be higher than what we would ideally want them to be.

Any fresh recommendations from Dolat Capital or which are those high conviction buys that you are recommending and putting in the buy list?
Amit Khurana: It will be up for review post the earnings season. We have not changed that drastically. I do not see a very significant change. One sector which is up for debate at our end is chemicals which has shown some evidence of pricing having bottomed out and depending upon the volume visibility that we get to hear in the earnings commentary and the overall themes that work out on the global front we will probably take a review at that and that could be one candidate for a potential upgrade from our side but that is not the case as of now.