ET NowIn a chat with ET Now, Mukul Kochhar, Head-Sales, Espirito Santo Securities, shares his outlook for the market as well as some stocks. Excerpts:
ET Now: How are you assessing the equity markets at the current juncture? Is there range-bound trade at least till we have the budget announcement in place and do you believe after that we could possibly log into a rally?
Mukul Kochhar: The thing is it is tough to call Nifty levels because the Nifty is a combination of a lot of stocks. Financials are still a reasonable place to be. Axis Bank still looks attractive and there are many such stocks, at least in the financials, one can pick where one can say that valuations are reasonable. So yes, these stocks should go higher through the year. Having said that, I am not so confident about the industrial space where stocks have run whereas improvement could take a couple of years to come. In my experience, investors find it difficult to wait for two years or even longer for improvement to show in numbers and the rallies are typically unable to sustain for that longer period. So, I expect financials to improve or improving numbers to start following, and valuations are reasonable and would stay invested in those cyclicals.
ET Now: Do you expect the monsoon to play a spoil sport in the rally which is we are seeing in the market that it could be dampened this entire big up move because of these concerns?
Mukul Kochhar: There are a number of risks growing. I mean it is not like we are living in a risk-free world. Liquidity still remains high. There is the geopolitical situation playing out in Iraq. There is the threat of bad monsoon. So there are risks on the horizon, but having said that, if one is talking about domestic economic improvement, my expectation is over time, numbers will triumph concerns. The stakes for the world are too high in Iraq. The situation will most likely be brought under control. If you look at even though oil risk premium that has not spiked.
Similarly monsoons have not really been playing well. Numbers are below long-term averages substantially. But if investment flows improve, the government starts delivering on certain aspects and asset quality on banks get better, those concerns can be handled.
ET Now: Tell us about some of these which you are currently bullish on at Espirito Santo. Also, what is your view on defensives, the classic IT and pharma trade?
Mukul Kochhar: With IT and pharma, it is very stock-specific. There was a trend actually in IT last year when the rupee was depreciating and the trend actually has played out over the last three-four years where the rupee has gone from 46 in 2010 to roughly 60 now. So IT companies have benefited a lot. So if it is calling for a stable rupee, then the story becomes slightly different. You have to play a more stock-specific game and once again in IT, there are stocks to be played.
I would probably be focussing a little bit more on the midcap to the smaller cap space. There is Tech Mahindra which we have always liked. At 12.8 times forward earnings the stock still looks okay given that there is optionality of acquisitions there. Then there is a stock called KPIT. It is trading sub-10 multiples in an environment where the market is improving and the management commentary has not been better. So my expectation is that it will not be a secular theme. I would stay away from some of the more expensive stocks like TCS. I am not convinced about Infosys at this point. So yes, one would be more selective there.
ET Now: Let us talk about the banking space that as a pack has seen some pretty wild swings. How would you approach the midcap banks? Anything that you like there?
Mukul Kochhar: First let us address the wild swings question. So the wild swings are happening because a lot of investors are sitting on a lot of profits and I did highlight a few concerns growing in investors’ mind. So in that situation, there is a tendency to book profits if something comes up because people want to put the money that they have gained in the bank and all this since gains have been pretty indiscriminate. There is nobody chasing stocks right now. That is why you see the volatility. You see the risk getting exacerbated into the stock price.
This is normal and in fact some correction is healthy for the stock market. So, I would rather just focus on valuations, as I pointed out. There are stocks to be bought and I remain comfortable in those stocks. In the midcap space there is another stock called Federal Bank. Its asset quality is improving and is available at 1.2 times price to book for 15 per cent ROE. Substantial improvement is expected ahead.
ET Now: As a house what is it that you are asking your clients to look at really seriously when it comes to midcap companies?
Mukul Kochhar: I have already spoken about Federal Bank. We also like Max. Max is a life insurance company and they have decent amount of optionality from their life insurance business. Whenever pension and annuity kick off in this country, substantial amount of value is there for an insurance company. The second company I would probably talk about in smaller cap is V-Guard. This is a company which is a south-based company consolidating in an unorganised electrical good space. 20 per cent plus ROEs are growing in mid teens, has fairly good financials and a very good management team. It once again it looks like a multibagger to me.
ET Now: From the metal space, would you be bullish on stocks like Tata Steel etc? Some of them have been making fresh 52-week highs in trade in the last couple of sessions.
Mukul Kochhar: The metal space is very interesting. It is more a play on reforms in India versus sort of any bullishness per se in the end market because one would not expect that because the government has changed in India. The global commodity prices will go on an upswing. So it is more a play on reforms and there honestly I do not understand the amount of bullishness in some stocks as there is indiscriminate bullishness across the sector.
Tata Steel is a stock that we like because of improving dynamics in Europe. We expect numbers to improve in the stocks. So the current valuation sustains because fundamentals are improving. Hindalco on the other hand. Novelis is seeing compressing spreads because recycling margin there is coming down. So, there are different stories and different fundamentals. But both the stocks are up. So in the metal space, once again I will be more discriminate. It is not like as the government in India has changed, everything should be bought.
ET Now: How are you assessing the equity markets at the current juncture? Is there range-bound trade at least till we have the budget announcement in place and do you believe after that we could possibly log into a rally?
Mukul Kochhar: The thing is it is tough to call Nifty levels because the Nifty is a combination of a lot of stocks. Financials are still a reasonable place to be. Axis Bank still looks attractive and there are many such stocks, at least in the financials, one can pick where one can say that valuations are reasonable. So yes, these stocks should go higher through the year. Having said that, I am not so confident about the industrial space where stocks have run whereas improvement could take a couple of years to come. In my experience, investors find it difficult to wait for two years or even longer for improvement to show in numbers and the rallies are typically unable to sustain for that longer period. So, I expect financials to improve or improving numbers to start following, and valuations are reasonable and would stay invested in those cyclicals.
ET Now: Do you expect the monsoon to play a spoil sport in the rally which is we are seeing in the market that it could be dampened this entire big up move because of these concerns?
Mukul Kochhar: There are a number of risks growing. I mean it is not like we are living in a risk-free world. Liquidity still remains high. There is the geopolitical situation playing out in Iraq. There is the threat of bad monsoon. So there are risks on the horizon, but having said that, if one is talking about domestic economic improvement, my expectation is over time, numbers will triumph concerns. The stakes for the world are too high in Iraq. The situation will most likely be brought under control. If you look at even though oil risk premium that has not spiked.
Similarly monsoons have not really been playing well. Numbers are below long-term averages substantially. But if investment flows improve, the government starts delivering on certain aspects and asset quality on banks get better, those concerns can be handled.
ET Now: Tell us about some of these which you are currently bullish on at Espirito Santo. Also, what is your view on defensives, the classic IT and pharma trade?
Mukul Kochhar: With IT and pharma, it is very stock-specific. There was a trend actually in IT last year when the rupee was depreciating and the trend actually has played out over the last three-four years where the rupee has gone from 46 in 2010 to roughly 60 now. So IT companies have benefited a lot. So if it is calling for a stable rupee, then the story becomes slightly different. You have to play a more stock-specific game and once again in IT, there are stocks to be played.
I would probably be focussing a little bit more on the midcap to the smaller cap space. There is Tech Mahindra which we have always liked. At 12.8 times forward earnings the stock still looks okay given that there is optionality of acquisitions there. Then there is a stock called KPIT. It is trading sub-10 multiples in an environment where the market is improving and the management commentary has not been better. So my expectation is that it will not be a secular theme. I would stay away from some of the more expensive stocks like TCS. I am not convinced about Infosys at this point. So yes, one would be more selective there.
Mukul Kochhar: First let us address the wild swings question. So the wild swings are happening because a lot of investors are sitting on a lot of profits and I did highlight a few concerns growing in investors’ mind. So in that situation, there is a tendency to book profits if something comes up because people want to put the money that they have gained in the bank and all this since gains have been pretty indiscriminate. There is nobody chasing stocks right now. That is why you see the volatility. You see the risk getting exacerbated into the stock price.
This is normal and in fact some correction is healthy for the stock market. So, I would rather just focus on valuations, as I pointed out. There are stocks to be bought and I remain comfortable in those stocks. In the midcap space there is another stock called Federal Bank. Its asset quality is improving and is available at 1.2 times price to book for 15 per cent ROE. Substantial improvement is expected ahead.
ET Now: As a house what is it that you are asking your clients to look at really seriously when it comes to midcap companies?
Mukul Kochhar: I have already spoken about Federal Bank. We also like Max. Max is a life insurance company and they have decent amount of optionality from their life insurance business. Whenever pension and annuity kick off in this country, substantial amount of value is there for an insurance company. The second company I would probably talk about in smaller cap is V-Guard. This is a company which is a south-based company consolidating in an unorganised electrical good space. 20 per cent plus ROEs are growing in mid teens, has fairly good financials and a very good management team. It once again it looks like a multibagger to me.
ET Now: From the metal space, would you be bullish on stocks like Tata Steel etc? Some of them have been making fresh 52-week highs in trade in the last couple of sessions.
Mukul Kochhar: The metal space is very interesting. It is more a play on reforms in India versus sort of any bullishness per se in the end market because one would not expect that because the government has changed in India. The global commodity prices will go on an upswing. So it is more a play on reforms and there honestly I do not understand the amount of bullishness in some stocks as there is indiscriminate bullishness across the sector.
Tata Steel is a stock that we like because of improving dynamics in Europe. We expect numbers to improve in the stocks. So the current valuation sustains because fundamentals are improving. Hindalco on the other hand. Novelis is seeing compressing spreads because recycling margin there is coming down. So, there are different stories and different fundamentals. But both the stocks are up. So in the metal space, once again I will be more discriminate. It is not like as the government in India has changed, everything should be bought.
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