sectors to bet on: 4-pocket bets with pricing comfort and profit visibility: Hemang Jani

Hemang JaniAn independent market expert, says there are four pockets where valuation comfort and also earnings visibility still exist. The first pocket is oil and gas, city gas distribution companies and also some OMCs. Banks are the second pocket where valuation comfort and earnings profile look good to some extent. The third is consumer discretionary and the fourth is metals. These four pockets need to be looked at.What is your take on the market? Do you think the party is here to stay? Should we be cautious or remain invested?
Hemang Jani: It’s a bit of a tricky situation, the way markets are going, and when you look at the valuations of the broader market, the way QIPs are going, the way IPOs are going, you definitely have to be a little bit cautious, but at the same time, as the party heats up, you don’t want to get left out either. So you have to be a little bit nimble in terms of sector rotation flows, and you should participate wherever there is a profit base at the time that you’re looking at, or you’re looking at purely tactical, short-term momentum trading.

Read also

But if I were to invest additional money in the market at these valuations, Nifty 22 times, midcaps and smallcaps above 30-35 times, then it is certainly not comforting, the best case scenario is already priced in and now that Trump has a slightly better chance of being re-elected as president, the interest rate cut is probably the last bit of good news that we get, so overall, in the short term it is positive but it is not very comforting when it comes to investing additional money.

Read also

What are the top three assets you would like to own and if you currently own the stock, are you confident of the returns and momentum?
Hemang Jani: If you look at the market and Nifty composition, there are three areas where valuations are still stable and profits are visible. The first one is the oil and gas sector, city gas distribution companies and also some OMCs.

The quarterly numbers may not be great, but at least there is comfort if oil prices come down a little bit because that will give you a lot of comfort. Banks is one of the spaces where we see valuation comfort and earnings profile also looking good to some extent, some consumer discretionary stocks and metals stocks.

If we leave out these three or four sectors, the rest of the group, whether it is PSUs, telecom or pharma, there is some degree of stretch. So, one has to look at these three or four pockets.

What do you think of any of the recent deals we’ve seen? Has anything caught your eye?
Hemang Jani: Unfortunately, I haven’t looked at recent performance and I think that generally speaking, most of the companies that are doing IPOs, valuations and history, are priced perfectly. We might see some movement here and there, but I’m not a big fan of pursuing companies at such high valuations.

Eureka Forbes is the only listed company that has a water purifier business, and Mr. Pota has been aggressively trying to completely restructure the company and recently released a very detailed presentation. Have you looked at Eureka Forbes lately?
Hemang Jani: No, I haven’t looked at Eureka Forbes, but what you’re saying is that in the listed space, there aren’t many competing products, but if you take some of the unlisted companies, there’s enough competition, enough products available per se, and the overall opportunity size for water products is not that big. If you look at Pureit alone, the top line that HUL was doing was just around Rs 300 crore. So I don’t think the opportunity size itself is too big.

What is your outlook on HDFC Life and some of the other players in this space? Do you think we will see an overall increase in savings again and therefore we will see an overall increase in ULIP products?
Hemang Jani: From a sector rotation perspective, some life insurance companies are coming back into fashion and if you look at the numbers, generally the numbers were consistent. What I liked about HDFC Life numbers is that ULIP growth was quite decent, led by Bancassurance and VNB margins were also at 18%, which is quite good. If you look at the APE growth in Q1, HDFC Life managed to grow by around 23-24%.

From this perspective, you can see more stability and strength, and the beta is not too high, so you can consider buying some insurance stocks with a yield of 12-14%.

What are you preparing for in terms of earnings for some of the other IT companies? How do you interpret HCL Technologies’ numbers? What emotions have the IT deals stirred up? What is your take on how to approach this sector?
Hemang Jani: We can take some positives from the IT sector data released so far, especially in the case of TCS, which says that the BFSI space as a sector is starting to pick up, order flow has picked up, job market has improved, even HCL Tech – the numbers were not the best across the board, but slightly better than market expectations. The silver lining is that some of these companies are expecting decent growth, let’s say, in the next few quarters or a year.

I think there is not much room to maneuver in terms of valuation. When I look at HCL Tech, at 25 times 25 earnings, the best earnings growth that we are looking at is around 7% to 8%. So because of the change in rotation, because of the slightly better earnings profile, there is some degree of interest, but it is not like everything is going to be great in terms of earnings growth. It is better to be selective.

TCS is a stock that we like, and in the event of a significant correction, it might be worth focusing on some of the mid-caps.

(You can now subscribe to our ETMarkets WhatsApp channel)