Bhasin further says: “Do a SIP in HDFC, Asian Paints. They can richly reward you in the next one year.”
What is it that you are making of the regulator’s commentary now on the lump sum investments into small and midcap funds and how it is going to spill out into sentiments and some bit of profit-taking further within small and midcaps?Sanjiv Bhasin: We have been cautioning you from the last one month that these stocks have run up very, very sharply ahead of fundamentals. However, the problem is the entry and exit. The impact cost is high when you try to enter these stocks like mutual funds did. They already rally in that form and now exit becomes a problem because most people are stuck at higher levels.
I still think the smallcap index needs more cooling down and more rationality. That is why largecaps are giving that opportunity. Midcaps, like you pointed out, have not corrected as much maybe because of better fundamentals but this is a consolidation phase. I do not rule out further deeper corrections.
Yesterday, we saw the sheer weight of Reliance and HDFC Bank bringing down the index sharply and these bouts can continue. We remain in a bull market but fundamentally and technically, we have reached a peak from where we can see some consolidation/correction. In the broader market, that can be deeper and that is why we are saying stick with the largecaps. That is where you should be because the caveat is not trying to time the market but spending time in the market and in that context it should be 70% largecaps in your portfolio.
Let us have that list, we already know that ONGC is a favourite amidst largecaps. What else are you recommending within largecaps?
Sanjiv Bhasin: The rupee has started to strengthen very well and that reaction of the rupee has caught most people on the wrong side. OMCs, particularly IOC, HPCL I am very bullish on. As a disclosure, ONGC, IOC, HPCL are in our portfolios. We think they are giving a very good shot because if the rupee starts to strengthen, then their margins automatically benefit.
Plus there has been no tinkering on taxes. There can be a Rs 100 fall in LPG prices which is absorbed. But HPCL and IOC are giving an entry point. These are going to report record numbers and that is where one can see more colour.
Secondly, yesterday we saw that against a weaker dollar, commodities are doing well. Yesterday nickel, zinc hit a three-month high and nickel, zinc, copper give a perfect opportunity. We are using this fall to make a SIP more in Vedanta which has been our top pick and we are also adding Hindustan Copper. It is the fifth largest copper player in the world and the sheer weight of copper is now adding up. It is the only player in the country which has copper reserves and it takes 30 years to create that. So even though Hindustan Copper has rallied sharply, at Rs 265, it gives a very good opportunity. We are long on this stock, we think this can easily head to 350 over a period of time.
What is your take on any of these stocks that are on Citi’s radar – HDFC life or Paytm?
Sanjiv Bhasin: We had a buy on all the three insurers – HDFC Life, SBI Life, and ICICI Pru. When that surrender value accretion came which caused a fall in the stock, at close to Rs 475, we added ICICI Pru. We got HDFC Life at Rs 550. We are adding HDFC Life and ICICI Pru. That together with SBI Life are core constituents of our portfolio.I think insurance is a no-brainer in the sense of the growth in APE and in one or two quarters, it can lag but the underlying business is doing extremely well. As new products come, their growth is inevitable. In the next 10-20 years, insurance is going to be a very key play.
On the other hand, even the RBI Governor commented that 85% of Paytm users were linked with another bank and not Paytm Payment Bank. So, 15% is what was left and I think that will transition. I think their gross MPVs have bottomed out and they could see strong accretion on their business model of lending. Now all that is in this humdrum of what has taken place but somewhere, at Rs 400, it is a very good stock to buy with a longer term view.
We also think that remedial measures, course correction for a lot of the companies which have been pointed out by RBI may also be faster moving than before and adherence to new governance will see bottoming out in the next quarter.
Coming to city gas, I have a buy on IGL which is in our portfolio. We think IGL will come out with even more stellar numbers and their business performance in Delhi and NCR and eastern region of UP has been very fast moving. That is where volumes are adding up and margins could be strong. So IGL is one stock to keep an eye on.
Rakesh Gangwal offloaded quite a bit of stake in Interglobe Aviation in a block deal yesterday. Then, AB Capital as well has to comply with RBI norms. But the board has approved the merger of its arm AB Financials with itself to try and comply with the RBI norms. United Breweries has come out with a female version of Kingfisher beer, which is Queenfisher. Anything looking interesting to you?
Sanjiv Bhasin: Yes, the Queenfisher will do well. I do not drink, but it will add up to the revenues. Millennial drinking has gathered steam. It is a very good way of marketing. We are bullish on United Spirits. United Breweries was much lower when we got in. We also like AB Capital. The transition move has been very swift. It is the holding company of the AIF, the mutual fund and the distribution arm.
I think capital will get even more stronger for them after this base of merging one of the companies. On decline, you should add that. But for us, the key over here is that the broader market will be in a consolidation phase. So pick your stocks. Right now, like I told you, PSU, OMCs, ONGC, Hind Copper, Vedanta, the metal/OMC space is looking very strong, as is insurance. That is where you should be upping your ante.
What is your take on ITC? The run-up has been quite steep in the stock and it was the discovery of the last year and a half or two years. British Tobacco Company has a lot more stake, 25% stake. So, this 4% is not really meaningful. But would you say in the near term, the valuations have run up for ITC?
Sanjiv Bhasin: Well, yes and no, both. Because see, the market was disappointed with the demerger which they did that was 10% of the hotel business which contributes to just 10% of the revenue. But as they reduce stake, the demerger of the cigarette business is going to be key, the mantra for ITC as it emerges as a powerhouse in the FMCG business.
ITC now has almost 70% of its revenue or profitability from the cigarette business. But the FMCG business is picking up very strongly. Rural growth, the type of projects they have in Haryali could be a good offering. So, to sum it up, after this sale, at Rs 400, the risk reward of being in ITC is very favourable. We are bullish on consumer stocks, particularly in the rural areas, like I have mentioned Bata, Patanjali. ITC can be a clear fit over there on their expansion of FMCG where margins will start to rise over the next one year.
How are you looking at this entire PSU rally, given that the view seems to be changing slightly and when it comes to banks, it would be safer to look at some of the private sector banks? so the rally in the PSU banks has been quite heady. How are you approaching this space?
Sanjiv Bhasin: We have reduced exposure to PSU banks. We think the private banks are where you should be putting your money. ICICI, Axis, HDFC, Kotak are looking good. By the way, I have been suggesting AU Bank for the last few days. AU Bank hit a new one month higher and given the feed it has across Rajasthan, Maharashtra, and their CASA increasing over a period of time, AU Bank provides a very good opportunity. We had a buy around Rs 575-565. This is one stock which can do well. We think you should take money off PSU banks and put it into largecap private banks.
In terms of the QSR space, what is the outlook on Westlife, Jubilant FoodWorks? There were some concerns around the cheese that was factoring in. Today, we have a note from JP Morgan on Westlife also, which has cut the target price for Westlife Foodworld by around Rs 60 as well. What is your view on any of these QSR names?
Sanjiv Bhasin: We are very bullish on Devyani which has gone through a transition. It has done an overseas acquisition but their franchise is doing extremely well. Also, Costa Coffee and the likes are adding more market share from Starbucks. Beside that, Pizza Hut, their other brands are doing very well. If you have a slightly longer term view, QSR will be back with the bang. So, Devyani is where I am putting my money and that can be an outperformer from here over a period of time. As regards Westlife and Trent, valuations have reached a peak. There can be some profit booking but these stocks have seen very, very sharp gains over the last two years. So, put your money in Devyani. It can be an outperformer in the next six to nine months.
How are you looking at the paint space with competitive intensity picking up now?
Sanjiv Bhasin: There is the key conundrum going through investors because everyone wants to chase high beta and they are neglecting HDFC Bank and Asian Paints. We have upped our ante and we think both these stocks are giving a very good entry point, along with some of the cement players like UltraTech, Ramco Cement.
It includes the whole basket of stocks which are dependent on input costs particularly Asian Paints because of fall in crude, and cement stocks because of sharp fall in pet coke. Their margins could surprise on the uptime. Secondly, there are times when largecap wealth creators like HDFC and Asian Paints go through a period of consolidation for whatever reason. But the underlying asset remains the prima donna.
Asian Paints and MRF have never diluted equity. Hence, the valuations look stressed. But I still think a little bit of an upside could be expected once the market consolidates and we see real wealth getting created in the blue-chip stocks. So, do a SIP in HDFC, Asian Paints. They can richly reward you in the next one year.