Nifty headed towards 19,425 in a year but mid and smallcaps may outperform it: Pankaj Pandey

"I like the entire auto value chain, right from OEM players like Tata Motors and Ashok Leyland to tyre companies and even some of the other names like Jamna Auto, which is a play on the medium and heavy commercial vehicles. Overall, the next two years looks quite attractive for CV as a segment and even with 20% growth, we will not be touching the peak sales in FY19,” says Pankaj Pandey, Head Research, ICICIdirect.com


What is the flavour this morning at ICICI Direct ?
Our overall sense of the market is that we are headed for a new high. We are in a sweet spot given that China is experiencing regular Covid induced pains and that has cooled off commodity prices which is beneficial for us. So, whatever margin pressure we were seeing and as a result of that we have seen about a 2% cut in Nifty EPS for FY24, over a period of time, for the next two-three quarters, some of this could get reversed.

That is why I feel that Nifty could be headed towards 19,425 and that is our 12-month target. But we expect midcaps and smallcaps to outperform Nifty. From that perspective, midcaps and small caps look a lot more attractive to us.

What is your take on NTPC given that the stock is now quoting at an 11-year high and there are so many rerating drivers in place with respect to the RE monetisation? Brokerages are talking about how it is going to be one of the largest RE companies globally in the next decade!
We do track NTPC. Within power, PSUs are looking quite attractive but the structural challenge in power still remains. We really do not expect much of a structural upturn in segments like this despite the fact that power demand is going to get a lot better. There is some bit of a relaxation in terms of FGD and the capex related spends but if one has to play power, probably Coal India is a slightly better option while bulk of their sales is towards the power sector.

Since the coal prices are quite high, there are a lot more on the e-auction, between Rs 2.5 and 2.7 a kg; compared to that, when you supply to power companies, you earn closer to half a paisa. So, from that perspective, Coal India looks a better bet. In the case of Power Grid, big capex is behind us and so really do not expect that stock to incrementally do much but within power PSUs, NTPC looks attractive but Coal India is a better bet.

There is a lot of action in tyre stocks. It is not that tyre stocks are new but looks like markets have rediscovered the importance of tyres. I do not know how to put it but it is not that suddenly tyre sales are going to be higher and replacement demand is going to come back. But in the last couple of days, the price action in tyres seems to be indicating that the market has rediscovered something which even we do not know about that industry or sector?
What has happened is that in the last two or three auto numbers, we have seen MHCV as a segment softening or the kind of growth that one would have expected. But the overall commentary is still quite positive in terms of this segment growing in double digits.

Companies like Apollo Tyres has been doing well. They are expecting European operations to do well. There is a clear focus on debt reduction and improvement in ROCs. It is sort of a good proxy play on the entire cycle which is where the overall enthusiasm is coming from. I will like the entire value chain, right from OEM players like Tata Motors to Ashok Leyland to something like tyre companies and even some of the other names like Jamna Auto, which again is a play on the medium and heavy commercial vehicles. Overall, the next two years looks quite attractive for CV as a segment and even with 20% growth, we will not be touching the peak sales in FY19.

ET Now: Why are some of these so-called penny stocks flaring up as if there is no tomorrow?
Pankaj Pandey: In the last few weeks, midcaps and smallcaps have been doing substantially well compared to large caps. Obviously penny stocks attract a lot of investor interest given the perception that one can buy more quantities but one should not really downtrade in terms of quality even in the crossed market conditions. There are a number of midcap and smallcap stocks which have fundamentally bagged where the growth rate is lot better compared to markets. That is what one should look at but investor interest rises when overall the midcaps and smallcaps do well. That is a time one needs to be cautious because anything which is not backed by earnings or fundamentals will pose challenges both in terms of price correction and time correction.

A lot has been said of late about Bollywood losing its flavour. Movies have not brought in the kind of revenues. A lot is riding on Brahmastra, Karan Johar’s latest one from Dharma Productions. From the stock market perspective, how would you approach PVR, INOX?
Overall the quality of content has not suited the taste of audiences and which is why some of the recent releases have really not done well. So there is a concern there but those are near term in nature and may not really sort of help in terms of a short term price movement.

But overall our sense is that PVR and INOX are still sort of structural buys. We have seen about 65-70% recovery on the ad revenues which is one segment which is expected to improve over a period of time compared to pre-Covid levels and the benefit of that is largely that flows are towards are bottom line. From that perspective, near term there are absence of players. I do not think Brahmastra alone will be able to recoup the losses what they would have seen in the recent past but as and when the quality of content improves, whether it is global content or regional content or Bollywood itself, things will improve.

So near term concerns are there and which is why we do not expect price performance to happen. What one can look at is a pseudo player like Phoenix Mills where the rentals are expected to keep growing in double digits. We will see a lot of these multiplex player being anchor tenants there and so that is a sort of a better play and overall consumption as a theme is looking quite attractive to us. In terms of space addition also, they are quite aggressive. So, Phoenix Mills looks better if one does not want a specific play like PVR and INOX.

What is your view on the defence basket? Is there more upside on the cards?
I think defence PSUs are the best to look at largely because when one looks at a company like BDL which is largely doing missiles and that is a sort of consumable, the growth rate expectation there is about 25% even for a company like Hindustan Aeronautics. With Tejas Mark 2, metal cutting is already done and we might have a prototype at the end of this year.

If the government goes on as planned with the addition of 108 odd planes, this company is already sitting on an order book of Rs 85,000 odd crore and the annual run rate is about Rs 25,000 crore odd. So that will add another Rs 50,000 plus crores to their overall order book. While near term, say in the next two years, earning growth could be lower, there is a big trigger in terms of visibility improving substantially and that culminating into revenue growth.

Same is the case with Cochin Shipyard. While there is still no clarity in terms of whether we will go for a third aircraft carrier, our sense is that the government is going to go ahead with a third aircraft carrier which again will be a big opportunity for a company like Cochin Shipyard which has been not really doing much in terms of price performance and mind you these stocks are still sort of better from a PE multiple perspective.

So BDL is closer to 20 times and HAL at about 24-25 times. From that perspective, we see a good amount of price move. Some of these names could do a lot better within the PSU pack or from a defence perspective. Overall indigenisation is going up and so in the next three to five years, we will have Rs 5 lakh crore kind of ordering and tendering opportunity. The bulk of it will be indigenised. Defence sector is expected to remain in the limelight for a decent period of time.

Which is the one stock which is getting ready for an exponential return in coming years though it might be getting ignored today?
We like a number of names where we feel things can be a lot better going forward within the midcap and smallcap space. For example, hospitality as a segment is expected to do better. We have already seen Indian Hotels having in excess of 33% compared to pre-Covid levels. We like Lemon Tree, where as of now, we have a target price of Rs 95. They are expanding their number of rooms from 8,500 to about 10,500 and with debt reduction or with a number of other factors playing out in terms of better occupancy ahead, Q1 is still a weaker season for some of these players. I think Lemon Tree is one which we feel can do a lot better from current levels.

ICICI Bank is priced almost to perfection. The market is expecting a second rerating when it comes to financials. Are you folks also doing that?
Pankaj PI cannot specifically talk about ICICI Bank because I am part of the same group but I think within BFSI, we like the entire space. Earlier we were a bit cautious on the tier-2 banks but our overall sense is that from a credit growth perspective, one will have retail which is doing very well and MSMEs as a segment is also doing well. Now within private tier-1 banks, HDFC twins are still not performing and till the time we do not have enough clarity in terms of what will happen to the residual stake, what they will be holding in some of the insurance companies, probably the hangover could be there.

It is the same issue with Kotak Bank, which is why tier-1 banks are really not performing on expected lines and the tier-2 banks are doing a lot better because the asset quality concerns are largely behind us. Credit growth has improved and within NBFCs, we like Bajaj Finance with an expected growth of 27-30% odd and with 7.5% book value, it is looking positive.

The other positive is that with aggressive selling by FIIs behind us, the BFSI segment is a big beneficiary of the overall inflows because it is a good overall proxy for consumption.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)