Naveen Kulkarni’s top midcap picks in IT and banking
It will take three to six months for real growth to start in auto sector, says Kulkarni.
What is the expectation from Eicher Motors? We are expecting the margins to contract. The launch cost and increased input cost could hurt the numbers. Is there anything that you are factoring in?
This is a stock that we currently do not have under our coverage but overall from the automobile space, we are not positive on the two-wheeler category as a whole. We are slightly more positive or optimistic on the four-wheeler category. But we see a lot of challenges with regards to channel inventory movement. Second, competitive intensity is continuing to rise. Demand also is not that great. There are much more challenges on the two-wheeler side rather than the four-wheeler side. We are not very optimistic at this juncture on the auto space especially on the two-wheelers.
Would there be a similar view when it comes to passenger vehicles as well? Across categories, one has the impression that other than Tata Motors because of JLR, even a domestic market leader like Maruti has been hurting on volumes?
Maruti’s play is slightly better because the channel inventory is not so high and has been on a decline. There is pressure both on the margin front as well as on the demand scenario. It will take a while for the base to become a little more favourable for the auto companies. That is when optically the growth will start improving, but the real growth rate also has to improve. That will probably take around three to six months. We will be in a little bit of a wait-and-watch mode for even the four-wheeler passenger vehicles. We are quite negative on the commercial vehicle (CV) play. I would say that among passenger vehicles, Maruti is slightly better placed, but even then, we will be in a wait and watch mode.
Let us talk about the overall liquidity. While quite a bit of support came in from the DIIs, FIIs have definitely been steering clear of Indian markets. Do you think that with the big election event around the corner, that kind of a position is likely to continue for the foreign investors?
Yes, it seems more likely the foreign institutional investors may not invest so much, but again it is very difficult to gauge when foreign institutional investors would start looking into the Indian market as a whole.
The global liquidity situation has been tightening for a while and I would believe that this year might be year of little bit of respite but it remains to be seen when that scenario actually changes. To be specific on the India front, I would believe that foreign institutional investors might stay away but it will depend on what the news flow will be on the political front. In a couple of months, we might start getting some of that opinion polls coming through, where if the political scenario emerges as a little more constructive, then we might start seeing some bit of flows coming through.
Let us understand the outlook as well on the sectors that you are bullish on. What is the earnings growth that you are expecting from IT? Which are the stocks that you like within the space?
IT again has been our favoured sector for a while now. We like both the largecaps and midcaps. From an earnings perspective, we are looking at 12-14% kind of an earnings growth coming through for next year. The stocks that we like in the largecap space are TCS and Infosys. Infosys has been our top pick in the largecap IT space. The stock has done quite well now and so that continues to be one of our bullish picks.
In the midcap space, we like Sonata Software. The results that the company reported last week were pretty decent. The earnings growth has been good. We are looking at an 18% kind of CAGR for the next two years. The earnings growth is likely to remain pretty stable and good for Sonata. So, that is the stock that we like in the midcap space for IT.
Across the midcap category, anything else that you like beside the stocks that you just talked about?
I would say that the IT midcap space looks attractive. The only challenge with the midcap IT space is that the earnings can be a little volatile. In some quarters, there might be misses but what we are seeing right now is a gradual improvement in earnings for the midcap stocks also. So, Sonata Software is the top pick in the midcap IT space. Apart from Sonata, something like Cyient might do better in the forthcoming quarters. We also like Majesco. Overall, the midcap space looks quite interesting to us at this point in time and earnings growth is more likely to pick up in the midcap space from here on.
Banking as a space has been one of our favoured allocation area. I have been talking about Axis and ICICI Bank for a fairly long period and Axis has done pretty well in the last couple of months.
We even continue to like ICICI Bank at current levels, I believe the stock is quite reasonably valued. There is a lot of room for the stock to rerate even from the current levels. The overall operating performance has been pretty good. So ICICI Bank is another name that we like in the private banking space. Among the midcap names what we like is DCB. That is another stock that we like in the midcap space from the banking sector.
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