Yesterday, gas stocks made a solid comeback. IGL and MGL saw some breakout moves. Are you optimistic about this pocket?
Yes, we finally saw a pullback in the market and what was interesting to see is that some of these beat names, particularly the banks, some gas companies and even to some extent the names of cement and automotive, experienced a slight decline. Since the correction has been so strong, especially for metal users, autos, oil marketing companies, gas companies and cement, at some point you may see a technical pullback or some sort value purchase.
But when it comes to picking pockets, we’d be comfortable in certain banks and computer names. We still wouldn’t venture to buy some of the oil marketing companies or gas companies just because they took a price increase and we really need to see what type of price increase needs to be taken and what type margin impact they may have to bear if this is not enough to cover the increased cost of inputs.
It’s a bit of a tricky situation and that’s why we’d be more comfortable looking to some of the big private sector banks like ICICI Bank and HDFC Bank or tech names that have also corrected themselves over the past two or last three months.
This morning I can see a note from Motilal Oswal recommending buying into weakness and HDFC Bank is specifically your first choice there. Is this a solo purchase within a bank, especially private banks, or is it an addition to the existing banking portfolio?
Basically our stance on the banking sector is positive and much of the weakness we are seeing say Bank Nifty would have fallen nearly 18%-20% from the peak and is more driven by FII selling . because those are the liquid names and that would be the best to have for the majority of FIIs. In terms of earnings or the macro picture, we don’t think things have gotten much worse so far.
We would certainly be comfortable buying into HDFC Bank where we believe the bank has underperformed and the stock has corrected a lot. So for people looking to buy dips, this might be a good name to look at. Other than that, we continue to have a positive bias even on ICICI Bank and we believe it was one of the best performing banks in terms of last three to four quarterly figures. So HDFC Bank could be an ICICI bank and some of the smaller banks like AU Bank or Federal Bank would be on our buy list.
Bajaj Finance is down Rs 2,000 from its peak, a correction of around 20%. It is a title where the company has recovered very well from the fall of the Covid. Between HDFC Bank and Bajaj Finance, what to buy if you can’t buy both stocks?
We definitely believe that both in terms of valuation comfort and in terms of stability and upside, HDFC Bank is better placed. In banking, there are two or three big names where people would really want to look if they want to buy HDFC Bank or ICICI Bank or even Axis Bank and State Bank of India.
But when it comes to NBFCs, people probably wouldn’t have too many options in terms of really big names. This is where Bajaj Finance would score, but from the perspective of the retail investor, who doesn’t really care if it’s a bank or NBFC and really wants to buy because the market got corrected. We really think HDFC Bank presents a great opportunity because the stock has underperformed the Bank Nifty and because of what we have seen over the last three months there is a further correction. At this price, some of these companies will rarely be found and this represents an excellent opportunity for retail investors.
Bajaj Finance is still trading at four to five times the pound. We know there will be high inflation and high commodity prices on demand. If demand is slowing and the global banking system is under pressure, this could be a concern due to sluggish demand and high inflation. Why should HDFC Bank or Bajaj Finance be considered longs just because the stock has fallen?
This is because we believe that on an earnings level or in terms of broader macro data points, things are not looking so bad. Look at how HDFC Bank has expanded in semi-urban and rural areas and what kind of market share it enjoys in digital channels. Their asset quality looks good and more importantly the kind of growth that is expected on the retail side as after almost three to four years we are seeing a return to loan growth. It is the backbone of global operational matrices for financial statements.
So I think through those metrics things are looking good and the stock has corrected a lot and when the sentiment is bad and prices are down that’s where you’ll have better opportunities to enter. When crude returns below $100 or commodity prices return to a certain level. I don’t think you will be able to buy some of these franchises at these prices or valuations. Of course, no one knows the bottom yet, but these are the price levels at which it would make a lot of sense to enter these names.
Auto stocks are down 20-30% from their recent highs. What’s really going on in this pack? How could we approach it if necessary?
Automotive is a sector facing multiple headwinds, be it commodity price inflation or the geopolitical crisis. Some companies with exposure to the EU and other parties will also experience uncertainties and challenges. More importantly, as we brace for a very significant rise in gasoline and diesel prices, there will be some impact because of this. It is therefore a sector that is struggling with multiple negative data points and we believe this will be the fourth to fifth downgrade we have seen on automotive names.
So, although we feel that prices have corrected, but due to the uncertainty surrounding several factors. we would move away from it, especially for traders. So if you’re an investor and you see that Ashok Leyland has corrected 25-30%, maybe there’s another 10% cut and it makes sense to buy, as an investor, yes , one could adopt this approach. But these are all cyclical names and active traders should really follow the trend. When you see a reversal in some of the names that are high beta in nature, that’s the time to really try to get into it rather than just buy because there is some amount of correction.
