Railway Budget: Expect upside momentum to continue in railway stocks going forward, says Gaurang Shah

In a chat with ET Now, Gaurang Shah, Geojit BNP Paribas Financial Services, shares his views on the market, certain stocks and the Railway Budget. Excerpts:

ET Now: Banks are correcting today. It looks like the market is now bothered about poor monsoon and high inflation. What do you think?

Gaurang Shah: Yes, I guess we are seeing the pressure, but we should give it one more week, because according to the last statement issued by the Met Department, there should be a decent amount of progress in the monsoon in the coming week. So let us hope that takes place so that inflation worries are eased off a little.

Near-term concerns are definitely there on the banking pack, but if you look beyond the three to six months’ time horizon, then private sector banks definitely qualify, on corrections, to be bought into the portfolio and kept for at least a year.

We have recently come out with a banking sector update and we do like names like Axis, ICICI Bank, HDFC Bank, Yes Bank and IndusInd Bank, to name a few, among the private sector banks.

On public sector banks, however, we are a bit cautious on the asset quality and the results season is just round the corner. We should have some deterioration compared to the last quarter numbers for the public sector banks in terms of asset quality, but again over there, Bank of Baroda is something that we like.

So one needs to be a little bit careful at least in the near term, if your time horizon is about two to three months or six months, but in the longer term, you should use dips to buy into banks, especially private sector banks.

ET Now: Investing in rail infra has really come into a standstill. What is it that you are expecting from the Rail Budget tomorrow, considering the hikes that have already happened?

Gaurang Shah: It definitely bites into the common man’s wallet and it is a problem when you talk about passenger fare hike, though for Mumbai locals, that is being put to rest for some time now.

But overall, announcement on dedicated freight corridors, investment in high speed technology as well as opening up the railway sector for private players and also FDI are the things to look at.

So Titagarh Wagons, TexRail and Container Corporation, given that it is an investment candidate, are definitely stocks that you can have. Till today, you will see these stocks doing very well. Once the Railway Budget is done and dusted, these stocks will go in for some consolidation and downward movement, but I hope there are a lot of positivities for especially these three names. The momentum should continue on the upside.

ET Now: Do you think tomorrow’s Railway Budget could set the tone for the Union Budget, or we should not mix the two?

Gaurang Shah: I do not think we should mix the two, because they are two different things altogether. My view is that on July 10, the move on the market is definitely going to be very, very choppy and volatile.

It will have its goods and it will also have its bad along with it. So one should possibly stay a little bit light and if you are in profit, you could possibly lighten up some of your positions before we enter the Budget day. But comparing the railway and the Union budgets, I do not think, is going to be the right thing. They are two separate things altogether.

ET Now: What explains the strength in IT? Nothing in the environment has changed. In fact, the currency movement has been slightly volatile. What is the driving force behind large cap IT and midcap IT?

Gaurang Shah: It is purely an anticipation of the earnings season. The April-June quarter should definitely throw up a lot of positivities and in times of uncertainty, since you have the Railway Budget, the survey report and also have the Union Budget, I think both IT and pharma are playing a bit safe.

I guess both these sectoral indices are doing well and in terms of the rupee-dollar, I do not think there is going to be a huge volatility. On depreciation, we may see the rupee at 60-61 against the dollar and on the side of strength, we may see about 58.50 to 59.

So for the next couple of months, you are going to see that range and if in the Budget on July 10, there is going to be positivities in terms of attracting FDI, then that strength should continue. In that case, you would possibly see some pressure on IT, but again, IT has gone beyond currency fluctuation.

If you have earning visibility and you have good names in the IT pack, both large caps and midcaps, you will definitely end up having a decent portfolio. So we would use opportunities to buy into TCS.

Regarding Infosys, there are issues and on August 1 we will possibly come to know what the changes would be. Ex-bonus adjustment, the MindTree stock looks quite attractive and the management has given commentary in terms of business outlook and growth going forward from hereon. HCL Tech, Tech Mahindra and Persistent System are some of the other names in IT that one should look at.

ET Now: What about Infosys? Would there be anything material that we can hear on Friday from the management?

Gaurang Shah: I hope so. The confidence has come back after the big change that has taken place very recently and in terms of commentary, I guess there should be some positivities, but there are issues in the near term. So if somebody does not have a risk appetite, it is better to go with TCS.

ET Now: IDFC has two challenges. The first is that the FII limit is frozen and secondly, as they migrate from being an infra company to a bank, the return ratios will get diluted. So what is driving IDFC?

Gaurang Shah: That is very true, but I guess one of the brokerage houses has come out with the report of Rs 300 or so. But my view is that you are going to see a little bit of pressure at least in the near term and it is going to be very difficult in a competitive environment as that in the banking sector.

Let us hope that things do fall in place and if the rain God does not play a spoilsport and if inflationary pressures are eased off a little bit as we go forward, there is a case for rate cuts coming in, maybe in about two or three quarters.

That should augur well for both banking as well as NBFCs. So one can take a bit of a longish view, but again, you are betting on a new business vertical rolling out. In a competitive environment how good it does is a big question mark.

ET Now: What about pharmaceuticals? They have been holding up relatively quite okay of late.

Gaurang Shah: Yes. We continue to hold our positive view on Sun Pharma and in terms of uncertainty, it is always better to be with safe haven sectors like pharma and IT and maybe some selective auto names. But again, Lupin has given you a good breakout.

It has possibly made a new 52-week high. Glenmark is the other one which has been consolidating for a very long time, but one particular stock in the midcap pharma is Elder Pharma. After the selloff of the business vertical, they have restructured themselves very, very well and have been consolidating in the Rs 180-220 range for a very long time.

There are possible announcements that the management is going to make in terms of their new business ventures that they are likely to go into with high margin products etc.

So pharma definitely is the flavour going forward and has been doing well in terms of earnings quarter-on-quarter and that run rate should only improve going forward. We have a bit of concern in some names wherein there has been a run up which has been more than anticipated. So one needs to be little careful over here. Dr Reddy’s is a classic case.

From Rs 2300-2400, the stock has gone up to about Rs 2700-2750. At these levels if you buy into Dr Reddy’s, the risk-reward is not favourable, but on dips, you can definitely keep it on your radar and at least about 15-20% portfolio allocation should be in pharma and IT.