We continue to remain overweight on the cement sector: Hemang Jani

The larger question here is that do people believe that the business model of , the digital payment bank and do they have the execution capability to turn it around using the underlying data base to sell loan products, to sell wealth brokerage, mutual funds so on and so forth says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL.


What do you make of Paytm buyback? This purely appears to me like an effort by the management to control the price?
First of all it is probably one of the few occasions where a company which is actually not generating frees cash flow or not making profit is trying to really do a buyback using the cash on its book. Some part of or large part of that was raised through the IPO and we all have seen how technically there were some issues and that is why probably they had to restrict the amount to whatever amount they have agreed which is Rs 850 crore.

Secondly I believe that a tender open offer is considered to be slightly better for the larger retail investors if there is a certain amount of clarity about how much the buyback ratio is going to be and what sort of an upside one can really make because that was the primary purpose of doing the buyback.

So when you do it through open offer relatively that benefit to the retail investors could be less and the impact as we all know given the fact that it is less than 2% anyway is going to be less.

The larger question here is that do people believe that the business model of Paytm, the digital payment bank and do they have the execution capability to turn it around using the underlying data base to sell loan products, to sell wealth brokerage, mutual funds so on and so forth.

So I believe we are a little away from a phase where it is going to be possible to take that call, you all have seen how the Jio financial services has been launched and what kind of disruption it can bring about so I think this is going to be a very small kind of a impact for retail investors.

I do not see that materially changing the sentiment or the stock price and we would continue to avoid this name at least for now.

What the outlook is on the entire cement space? How are you looking at the overall dynamics?
Overall we continue to be positive on the cement space mainly because a) we are seeing consolidation in the sector, b) post festive season there is a considerable pick up in the activity both from the government side as well as from the private side in terms of construction, real estate and related activities which is definitely extremely good.

We have seen cool off in certain commodity prices and petcoke price in particular. Also we feel in the next couple of years, cement would be one sector where there is going to be a margin expansion of almost about 430 bps. So I think the operating leverage can come up in a very big way and that is why we feel that one should remain overweight on the sector. Our top picks over there being

and of course some of the midcap names like , Birla Corp and Rampur Cement.

Do you think one can now start to expect strong ROA improvement coming in from post this fund infusion?
I am a little worried with the kind of momentum we are seeing with smaller bank stocks be it PSU banks, Yes Bank and many other midcap infra companies. In case of Yes Bank yes it has been a laggard for a long long time and given the fact that the entire banking financial services spaces has seen such a big up move and rerating on the back of credit growth cycle turning up. So some people may be taking small allocation kind of an exposure to smaller banks and may be few quarters could be good but typically our experience has been that it makes more sense to stay focussed on the larger names with the better balance sheet, much better visibility on the earnings who can withstand the volatile phase of the economy in the market cycle. So yes from a trader’s perspective some of these PSU banks and Yes Bank are extremely good bets but not too comfortable with the momentum and the way the stocks have run up in the past few days.

Where within the autos do you see some meaningful gains being made in the year ahead because for a large part of the year has been a bit of an underperformer?
Absolutely. I think we have a positive view on autos and we think that though post this festive season two monthly numbers have not been that great but there is definitely a sense that next one year or so would be reasonably good particularly for the passenger vehicles and the CV part of it. Two wheelers is a space where we are not too sure, the growth visibility is not looking that great. Coupled with that you are going to see some benefit of the margin expansion and in our case. I think automobile would see a margin expansion of about 150 to 180 bps and that would definitely bode well for the sector. Our preferred pick is

followed by Mahindra & Mahindra and and in the auto ancillary space we have a strong positive view on Bharat Forge.

What is the midcap idea for the long haul for the next year?
We could look at some of the midcap cement names; JK Cement,

, Dalmia Bharat as I pointed out earlier this is going to be one sector where you are getting the benefit of the top line growth as well as margin expansion so the operating leverage play can be very-very strong for the cement sector. And these two names that I have highlighted JK Lakshmi, and Dalmia Bharat I think these are the names that one can really go with.

Despite the time being favourable for the airline industry Indigo has this overhang of promoter selling. One of the promoters is selling and we know that supply is very large, is that the irritant for a company where we know next two months are strong, crude is down, demand is high and Air India capacity is one year away? But despite that the stock has done nothing grand, is it because of the overhang of supply?
I think there are two reasons; one is of course the promoter overhang but I do not think that by itself could be a big factor that would drive away the investors. I think the larger issue with the airline companies has been that they are not able to deliver consistent performance across the crude prices. So you may have a phase where the overall growth in the traffic is good and crude prices are down but we all know that this kind of a scenario is not going to remain there for too long. And typically airline companies go through a phase of turbulence in terms of their operating matrices when the crude price goes up, some government intervention and so on and so forth. So Indigo by far is the best player with the most interesting business model and a much larger market share. So somebody who wants to come into the space I think this is the choice by far but it is not something that is fitting into our overall framework or parameters that we look at. So yes, it may be a tactical opportunity but not a long term one.

What is the new thematic idea or new mid or small cap idea now?
We are expecting a major margin recovery for the corporate India over the next couple of years. I think some of the consumption companies maybe a Metro brand, this is something that is looking very interesting. We just initiated the coverage and we think that for the next one or two years this is going to be a very interesting theme because of a combination of factors like more footwear people want to have, margin expansion and within the sector the company which has demonstrated a much better business model and consistency they would get disproportionately higher market share and higher PE multiple. So I think Metro is something that we have a very high conviction from an investment perspective.

Does the kind of run up that the stock has already had not worry you? I am guessing you are obviously seeing the very long term prospects here?
It is good that you are trying to get into something which is showing that kind of strength and in a bull market you do see the companies which are making new high, which are outperforming tend to really give you disproportionately higher returns. So as long as the company delivers in terms of its performance and market share and ROEs we would not be perturbed. Yes, like some of the companies within the space have actually gone through a bit of a difficult patch, for example, Campus Footwear actually corrected quite a lot so I think we have to just be a little selective about what we are getting into without worrying about how much it has already gone up.

I will stick with PSUs, no bank, no railways, no defence then what is left ? It has suddenly gone from 650 to 720?
I think there is interest for some of the better PSUs where the performance is good so if you look at the LIC performance I think last quarter the margin picture was much better and they have also guided for a healthy recovery for the next couple of years. And there is sense that the overhang of the IPO is pretty much over and the company is now performing so there is some interest given that the entire PSU space has got rerated.

So we have been liking LIC and we had actually put out a buy recos after that the stock had corrected almost about 20%. So we do think that this is one name where one can have a reasonably good allocation from a longer term perspective and whenever you see the insurance sector getting into limelight or the value stocks or value strategy coming into play I think LIC could be an interesting stock to look at.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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