Prefer midcap over largecap cement: Gautam Trivedi, Religare Capital Markets

In a chat with ET Now, Gautam Trivedi, CEO, Religare Capital Markets, says they are always in the lookout for the next interesting midcap company. Edited excerpts


ET Now: The other side of the market has been autos and just about everything seems to be going in favour of those and especially the domestic passenger cars as well as the CV players with regards to the scrappage policy coming out soon. At which point are we in this entire rally in the auto space? Are we towards the fag end? Do you think the journey has just begun and can one still hop on to the bus for most of these auto players or get into the car for a Maruti? Is there still room to buy these stocks and make money over the next one year?

Gautam Trivedi: Well over the next one year we are definitely not at the start of rally. This is 70-80% of the way but with a three to four year view, it is going to be very positive. We did this analysis for the last two pay commission hikes and we found that over the next three and six months, 12 months, 36 months and five years, the automobile sector basically had a massive rally given the fact that the pay commission implementations took place and over 20 million people ended up benefitting as a result of increased pay hikes.

So that I think is really what is driving the auto stocks and we are not really surprised with the rally. We have buys on most of these companies as far as the passenger and two-wheeler space is concerned. As far as the CV space is concerned, I think, a lot needs to be understood with respect to what the NGT is doing, what the Supreme Court is doing and also some of the initiatives by the PMO to curtail pollution in this country.

We believe that coming out of the scrappage policy is only the first step in essentially combating pollution in this country and as a result it would be a good thing if it actually were to come in and come out with a policy of scrapping CVs and trucks that are 15 years and older. So if that happens, the replacement demand would come in for names like Eicher, Ashok Leyland and of course Tata Motors would be phenomenal. As a result, we have buys on all three stocks and less so for Tata Motors because in the sum of parts, India is still a smaller business but a definite way to play this would be Eicher and Ashok Leyland.

ET Now: The other part of course has been NBFCs. Is it even worthwhile, spending time on trying to analyse whether or not valuations are getting rich here?

Gautam Trivedi: You got to think about the NBFCs. The reality is that if you look at the monthly numbers of credit growth in India, the last print was 8.3%. Again at the peak in 2006-2007, we were at about 35-740% growth. That may have been one end of the spectrum and maybe and outlier but the fact is we have single digit credit growth today.

Looking at most of the SME or mid-cap companies and we deal with a lot of them, we find that their access to credit growth or credit today from the traditional banking system is really blocked and that is again a function of the NPL problem. As a result they do not have a choice but to go to the NBFCs.

Now this trend of mid-cap and SME companies going to NBFCs we believe is going to continue for at least the next couple of years until the banking system is repaired and banks resume lending out. So it may not be a permanent market share gain but that is definitely happening where the NBFCs are eating into the banking space, especially within the mid-cap and SME space.

ET Now: Rate sensitives, by and large, have dominated the market mood the last few days at least if not more. I guess if we take a one year view as well that has probably been the case and it is a difficult one to choose over the other but what would be your table thumping yes to investment? Would it be autos which are doing fabulously well, would it be private banks which are also at the top of the heap, or would it be NBFCs over the other two right now?

Gautam Trivedi: It will be autos and banks and the private sector banks followed by NBFCs because this may not necessarily be a permanent market share gain but the fact is today the NBFCs are doing extremely well but we still prefer the Kotaks, the HDFC Bank, IndusInd and more importantly Yes Bank. We have the highest target price on the street on Yes Bank at Rs 2000.

ET Now: There is a bit of a touch and go here. For example, a Jubilant and a few others used to occupy that niche space for a really long time. That story has gone a bit bust as the quarterly number suggest as well. Suddenly we have the microfinance and the small finance banks out there which are also a space of their own and then there are these specific pockets like speciality chemicals which seems to be everybody’s favourite and the managements which have come on air. We had a Deepak Nitrite actually, not a small company but one with Rs 1500 crore market cap saying that their turnover will go up 3x over the course of the next three years.

Now these are unbelievable growth stories from large midsize companies as well. Where is your bias towards within these niche pockets currently?

Gautam Trivedi: Well if you look at the niche area or more, a lot of these companies are in the midcap space. We did not follow the chemical space so I am not really qualified to answer that but what is indeed happening for the last two and a half years is the quest to find the next interesting midcap story and that is something which we do at any point of time. The three to four members of our team in different parts of India are meeting the next interesting midcap companies. I travel on an average once a week to some part of India to find the next interesting midcap company. So the appetite for midcap companies remains extremely strong and our preference has been midcap cement over largecap cement for most part because the valuation discount is so wide that it does not make any sense to buy the largecaps.

I think that is really where we are coming from for the next level of growth and where you should put your incremental capital in the market.

ET Now: Since you travel at least four times in the last one month or eight times in the last two months to find that interesting midcap, what has been the most interesting companies/ideas/theme that you have come across and from which geography?

Gautam Trivedi: I actually travelled all over and so it is Bangalore on Thursday and the week before last I was in Hong Kong and Singapore with an interesting company called Sanghi Industries. I do not know if you know those guys but it is very interesting. The next generation is just doing a phenomenal job of taking this company to the next level. So that is one of our favourite stocks in the midcap cement space.

The other one we like which we do not cover but we think is doing extremely well is Indo Count. The stock has done extremely well over the last three and a half years but given all the controversy around Welspun, we think Welspun looks interesting given how much it has fallen but Indo Count remains a very solid company.

The important element in all of these midcap companies really is banking on management. So you have to meet the managements of these companies. You cannot take a call by just simply meeting the CFO and the IRR person.

So what is the promoters’ vision over the next three to five years or where he or she wants to take the company is really really important. I think these two companies in particular stand out at least of the companies that I met in the recent past.

ET Now: Welspun, really? So, none of the concerns raised by Target and whether or not they are going to renew their contract with Welspun worries you? You think the price is good enough to buy it right now?

Gautam Trivedi: No I am not saying that. What I am saying really is the fact that the one the single biggest problem that they had really with Target was the fact that their Egyptian cotton was not 100% pure Egyptian cotton. Now it is a bit like Scotch Whisky and similar comparison because people always say that the amount of Scotch drunk in India is in multiples of what is actually produced in Scotland.

So the problem is the same with Egyptian Cotton. The amount of Egyptian Cotton traded globally is multiples of what is actually produced in Egypt. As a result I am sure there is a lot of adulteration which is sometimes beyond out of control of these companies.

I am not defending Welspun. All I am saying is that seems to be a real problem when we spoke to a whole bunch of other people besides Welspun who are in the home textile business and they have said the same thing. As a result. may be again we do not cover Welspun but the fact is given the sharp drop in the stock and then the rally that we have seen in the last few days, may be we are not too far from the bottom that is what I am saying about Welspun.