Neeraj Dewan on 3 sectors that may give negative surprise this quarter
We are telling our clients is hold on to the consumption stocks because the market momentum is strong.
What is the sense you are getting when you look at the price movement for a lot of these companies?
Last few weeks, we were recommending consumption stocks and some of the auto names there actually have seen some movement and the prices have come up. The value was not as depressed as it was two-three weeks back. Our recommendation to our clients is -- hold on to the stocks because the market momentum is strong.
There are two things which the market is really fighting -- the kind of perception because of insolvency issues and the slowdown woes. The government is now taking measures and they are also very conscious of the fact that these two things have to be resolved. That is one reason why we are seeing some outperformance in our stocks in the market. That outperformance may continue though you will get opportunities in between in dips. Overall, the setup looks positive to me.
Why do you say positive? The worst in terms of earnings is priced in and I am talking about the fundamentals?
Yes, this quarter may not be a good quarter for most of the companies because there is definitely a slowdown which would be visible in the numbers. But look at what is happening now. Things are improving. There may be some pickup because of festive cheer, but with the government steps being taken and the corporate tax cuts and the possibility of more interest rate, at least one more interest rate cut happening.
The cost of capital is going to be low and there is a continuous effort on the part of the government. They also will not like to see any of the NBFCs or banks defaulting or going down under. I will not take that as a possibility so there may be just this time which you may get the ups and downs because of some negative news like we got about PMC Bank. I do not think it would have a contagious effect on broader banking or the NBFC space. That is why I feel that the bottom may have been made though we may be in some range for some time.
We have already started seeing some movement in consumption names. There are companies which are vying to improve their market share in this kind of depressed market. Even in the auto space, there is some movement already happening. We saw decent numbers coming for TVS Motors though the companies have also taken steps to make sure that the costs are kept under control. When some pickup happens, it will have a decent effect on the bottom line also.
Where do you expect some negative surprises could come in?
I will not say there will be any shocks as such but there is a negative news which may come in. Even among the corporate lenders, results may not be great this quarter also. But the kind of price damage we saw in some of these PSU banks which were taking the worst into account, which may not be the case in reality. But definitely some negative numbers can be expected from some of the corporate lenders like we saw in Federal Bank and IndusInd Bank.
Some of the metal names also will not be picking up as far as this quarter is concerned and there could be some negative surprise in autos also. We track on a month to month basis and a quarter really does not matter that much.
On the back of some of the global factors like trade talks and GDP data from China, where do metals stand on your radar currently?
The trade talks between US and China are looking more favourable and with just one year before elections in the US, I do not see anything negative happening on that aspect. You may get some incremental positive news only if Brexit goes through tomorrow in the British parliament.
These global headwinds will eventually get out of the way as far as metal is concerned. I am really positive on the infrastructure space. So metals will pick up because the domestic consumption should pick up going ahead. There should be selective buying in metals because we have seen a decent selloff in that space.
Would you go for the more beaten down names or would you go for some of the quality stocks, just at lower levels?
It will depend on the earnings potential of the company. So in the consumption space, though I was positive on Godrej Consumer and Dabur, those stocks have moved up 10-15%. I would rather wait to add more positions but I meanwhile, I would hold on to my position.
Going into midcap names, we track a Venky’s or a Future Lifestyle. I feel they are beaten down a lot but the pickup has really not happened as far as stock prices are concerned. I would really look across sectors where the valuations are attractive and there has not been any accident as such as far as companies are concerned because in this kind of a market, any small accident can really lead to a strong selloff.
Many companies have been stable as far as earnings are concerned. Even in small companies, we track Action Construction Equipment. In the NBFC space, there is so much concern regarding insolvency and default, but there are good quality companies which are available at attractive valuations. There also, I would look at opportunities.