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Mahantesh Sabarad on 2 stocks that may give 20% upside going ahead

The market seems to be directionless because you do not have major events to be factored in.

ET Now|
Updated: Dec 16, 2019, 09.16 AM IST
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ETMarkets.com
Mahantesh Sabarad, SBICAP Sec-1200
A lot of good news is lined up for the next year, but in the immediate few weeks, probably there is no such trigger available, says Mahantesh Sabarad, Head, Retail Research, SBICAP Securities. Excerpts from an interview with ETNOW.

What do you make of the market move last week? Is that sustainable?
Not really. The last six weeks, the Nifty has been around the 12,000 mark. The market for the time being, seems to be directionless simply because you do not have major events to be factored in. We knew that the Fed was likely to pause. The whole anticipation has played out really well. The trade talks between US and China are along expected lines.

The second quarter results that came out really did not lead to major upgrades. We knew the macroeconomic data in India was likely to weaken, some advance numbers were coming in.
From a trigger point of view, you did not really get any major triggers for the markets coming in and therefore it has been six long weeks of Nifty being somewhere around that 12,000 mark.

But that does not mean that when we go forward in the new calendar year, there will be a repeat of this performance. It simply tells us that probably the market is now consolidating for the next upmove, when a base effect from macroeconomic and even earnings standpoint come, growth will be apparent.

A case in point is automobile sales, which probably will start to recover as we move in the next calendar year. Consumer goods companies have been showing good volume growth as we go forward. Interest rates are not threateningly high, although the bond yields have moved up sharply. Banks are now looking forward to recoveries. A lot of good news is lined up for the next year, but in the immediate few weeks, probably there is no such trigger available.

What do you make of the move in some of these metal and auto names? Did you expect such a sharp rebound?
From an automobile perspective we do know automobiles are generally cyclical but this time around we witnessed a sharp cut or downtrend in the automobile sales. I would say a structural change was also happening along the way, which has been dictated by the euro six norms or the Bharat Stage VI norms as it is called. Vehicles have to be upgraded to that once we reach April next year. The preparations have to begin in advance.

There is also the issue of electric vehicles coming up, although in the policy front, not enough push has come in. For automobile sales, the past experience of cyclicity would have told anyone that the deep dive in sales we saw would get translated into recovery the following year and therefore, there should be an up move in stocks. That is what probably has happened now.

The only thing is that the confirmation of this up move has to come from the earnings standpoint. There should not be any erosion in margins and profitability should remain where it is. Even in such a downtrend, automobile companies in the listed space have delivered robust profits. The profits may have been declining on a year-on-year perspective but the margins largely remain protected.

I was not surprised with the up move in automobile companies but I would await a confirmation that these margins remain sustainable. The Euro VI cost,, especially, needs to be absorbed by the automobile companies without much margin effect.

Any picks for us?
Very recently, we have started covering a small company, Atul Limited. Aul is a chemical company which has a wide range of products – in lifesciences and a host of industrial chemicals. They have been growing quite well. A quick glance at the balance sheet tells you that this is a very healthy company, generating free cash flows, zero debt, more than 20% ROCE and the valuations are not too challenging.

The current valuations on forward basis would be roughly about 20 odd times. This is very good. The company is undertaking a lot of capex, close to Rs 500 crore over the next two years. The company expects to add about Rs 850 crore to the top line as we go forward. So this company seems to be doing all the right things.

Over a period of time, they have launched a host of new products and they have upgraded their margins from about 11% to close to 19% odd. That is a commendable improvement that the company has done. These are reasons why we like this company and at this juncture, these are poised to grow, with most of the capex behind it. On Atul, we have a price target of Rs 5,000 right now.

Along with that, we have came up with a coverage on a NBFC -- Shriram City Union Finance (SCUF). It is linked to the Shriram Finance Group, doing really well in terms of SME lending, automobile lending and mass presence in the south. Strong ROAs are getting delivered and on liability side, no problems or challenges are being faced. SCUF is something that you can look at.

SCUF does cross selling and up selling within the Shriram Group. Shriram Transport Finance is the primary entity which does vehicle financing but SCUF is also into that. For SCUF, we have a target of about Rs 1,680.

So these are two companies that we have come up with coverage for. From the current market price, both will roughly give about 20% upside.

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