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Go for quality IT and pharma stocks: Mayuresh Joshi, Angel Broking

The TCV deals for top-tier IT names including Infosys, TCS, NIIT & MindTree are reasonable, says Joshi.

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Last Updated: Jan 18, 2019, 05.14 PM IST|Original: Jan 18, 2019, 05.14 PM IST
Mayuresh Joshi-Angel Broking1200
One needs to take a stock specific approach within these markets but specific names within the midcap and largecap players should do well, Mayuresh Joshi, Fund Manager, Angel Broking, tells ET Now.

Edited excerpts:

What is your call on pharma when Sun Pharma is declining this way?

The landscape for the sector as a whole has definitely improved over the past few quarters. The pain and hit that this sector took over the last couple of years was very evident both in terms of FDA complains which were thick and fast both in terms of import bans, import alerts and that was a double whammy because the approvals were probably not coming through for the affected plants and the compliance and regulatory costs in getting these plants cleared had a huge say in terms of P&L.

The other element as you rightfully pointed out was also the pricing pressure that these companies faced which pooled down earnings estimates for a whole host of pharma companies barring a few which had a few niche products that still had pricing power.

The third element obviously was as these concerns started abating over the last two to three quarters with FDA issues getting resolved, you had a far more consistent speciality pipeline getting built by these pharma companies because of the elevated R&D expenditure that they had done over the last two to three years. These drugs have the exclusivity and the pricing on their side and that gives them the support from a margin perspective as well.

As these approvals will start coming through, the margin improvement and the margin profile for a whole host of companies should probably improve because a whole host of tier I, tier II companies have niche ANDAs which are lined up for approvals.

The third stack obviously is the valuation. A few companies are valued on the richer scale when you are talking about FY20 estimates. As you start rolling over to FY21 with the assumptions of a few more drugs coming into the pipeline, the earnings look far more sanguine. It does make sense to hold on to some quality stocks in top-tier and mid-tier space.

What is the trend you are seeing in IT? Inline numbers came in from TCS, Infosys. But I guess all the excitement around largecap and smallcap IT continues to be with the buybacks and bonus issues.

That would be the case and if you speak in terms of how the currency has moved, that really has created pain points for the sector in terms of reported EBIT margins. To top that up, they are in traditionally weak third quarter because of Christmas holidays.

The fourth quarter (Q4) will depend on how the discretionary spending patterns pans out for the US and European markets. Digital revenues are increasing every quarter around 30-35% for the top names and even few of the midcap players. It is even 50% in certain cases. That is an encouraging sign because digital is a better margin contributor.

Having said that, if there is an inherent and a perceived slowdown which is expected to take place over the next few quarters, what kind of an impact does that probably have in terms of their order books? The order books are pretty stacked up at this point of time. The TCV deals for top tier names including Infosys, TCS, NIIT Technologies, MindTree are reasonable which means execution will happen over the next few quarters and the margin should also hold up.

In such a scenario, when you are expecting a reasonable earnings growth, you are probably valuing companies on a richer scale in terms of their price earnings multiples, going forward. So the richly valued companies will probably stay stuck in a range. Companies which are able to outperform in these markets in terms of delivery and where the valuation is probably a little bit on the lower side, can probably outperform.

One needs to take a stock specific approach within these markets but specific names within the midcap and largecap players should do well. We continue holding on to stocks like Nucleus Software in the midcap universe and Infosys in the largecap space.

Going by the kind of December order sales numbers, what are you pencilling in for Maruti?

Going purely by numbers that have got reported over the past couple of months, I think softness for the auto industry would continue. Again, the reported numbers in Maruti, the softness that we have probably seen in volumes are going to have an impact on overall top line growth. The December quarter is expected to be muted.

To top that up, input prices have moved up. They have taken selective price hikes but what probably happens even in the December quarter is the liquidation of inventory for 2018. The discounting factor remains extremely high in the month gone by. The margins on the EBITDA front should also be under some amount of pressure and softness.

But it is the longer term outlook that one really needs to look at. The kind of launches as you rightfully put through is something that the Street is keenly awaiting for. The response that it probably gets and the kind of market share that it probably has across its variants does hold Maruti in a very commendable position at this point of time.

The price hikes that they have probably taken and its impact on volumes -- the management was very categorically said volumes should probably normalise over the next few months -- and as margins normalise as well, the leverage should get cleared out on the balance sheet. Coupling that up with the kind of utilisation one sees at its Gujarat plants and better fixed cost absorption on that front, there is obviously value for a longer period of time. From a short-term perspective, there might be pain but that pain has got played out on the stock price.

Which way is Reliance headed? Would you say that a significant upside is still left in the stock?

It has been one of the best performing stocks over last year. But I think the landscape has to be pulled over the next four to five years for Reliance at this point of time when you are talking about their two core businesses -- refining and petchem -- at this point of time.

There is obviously some amount of concern relating to terminal valuations for both these business segments and the management is very clear about driving retail and digital services which are going to be great value drivers. Now even in yesterday’s numbers, we could see the contribution increasing. The EBIT margin contribution both from retail and digital services is increasing as well. With the increase that you are seeing both in terms of volumes and expected numbers both on the top line and the EBIT front, that should play out meaningfully.

At the same time, capex in their core businesses of refining are petchem are behind them. There is the expected stabilisation. The IMO regulations that will come through are definitely going to impact the refining part of their business. Petchem obviously is a lot more dependent in terms of crude pricing and what probably happens in terms of downstream pricing as well and there is a whole host of complex products there. You got paraxylene, PX products and PTA products.

There might be some lumpiness in a quarter or two considering each of these individual business lines within the petchem part but the overall numbers should hold up for Reliance. So yes, it is a larger canvas that I am putting through over the next two to three years. I still remain very positive on the stock and a clear disclaimer is I own this stock in my funds.

L&T is all slated to deliver its numbers next week. Do you think we could see strong growth within the infrastructure segment? We have seen large orders coming in. Would that help the overall order inflow?

The kind of reported orders that L&T has put forth in the quarter gone by and the expectations of front loading of orders that are expected to continue in this quarter as well because of general elections looming over the next few months and expectations of muted orders in the quarter to come.

A large element in terms of the orders that they have probably received over the past few quarters specifically on the infrastructure side and the kind of execution that this company is probably doing, is the direction that the company is slated for and are probably poised to go after.

In terms of their overall targets over the next three to four years of doubling of revenues, of taking EBITDA margins closer to 12 to 15 odd percent, the revenue growth that is expected to be delivered on similar accounts has expectations of working capital requirements coming to the 18-19% mark and ROE expansion at 18%.

Even if they gradually improve over the next year and a half, the general macro situation in the country and the execution for the company on the domestic and overseas front, despite fall in crude prices is something that one really needs to watch out for. The overall consolidated book when it comes to EVP, when it comes to infrastructure, hydrocarbons, should hold up pretty well. It is a barometer to the Indian economy and simply put, anybody who is holding on to the stock, should continue to hold it.

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