One should be careful about consumer and chemicals companies ahead of the earnings as many of them are trading at extremely high valuations, says Sandip Sabharwal, analyst, asksandipsabharwal.com.When I saw the TCS numbers, I thought that IT companies may not see expansion in earnings this quarter but MindTree, Infosys or LTTS results show that these companies are getting serious business traction. We can argue about margins and attrition rate but the growth is unimaginable! These are blockbuster numbers.We have to distinguish between the large cap companies and the midcap ones. In the midcap large sized companies, the numbers are very good and that is leading to a traction in stocks like MindTree, L&T Infotech and L&T Infotech. On the large cap side, companies have reported decent traction but there has been a margin squeeze. But in the case of mid-tier companies, their margins were very depressed last year in the same quarter because they were not as resilient on the business front as the larger ones. As the business is coming back for them, their margins are trending up. In any case, for most of these companies, their margins are 5-7% lower than TCS and Infosys. So, some amount of catch-up which could still happen for some of these companies if pricing goes up for them. As for the larger companies, it was expected in the case of Infosys. If they held onto the earlier projection given what was actually expected for the first quarter, that would have meant de-growth in some of the later quarters which was not practically possible. But for some of the larger companies, which already have high margins, it will be very tough to maintain margins and that is something which investors need to factor in. The growth traction is for real but profit growth might still lag behind what people in general are expecting. So what should one do with midcap IT stocks now? What should someone, who has bought say Birlasoft or LTTS or LTI, do now?The case for a sell out of these stocks is not very strong but some of them are trading at almost 100% premium to the valuation. While the historic discount to the largecap companies might not have been the right thing, some of these companies are already trading at a premium to the largecap IT companies. So I think that might not be sustainable. People who are holding these stocks, given that they are cash generating companies, could keep allocations. But if one has excessively over-allocated, then it would make sense to take out some profits at these prices. As for a fresh entry, I would be uncomfortable at these prices for most of them. Where else within the listed universe are you getting uncomfortable with the valuations ahead of the earnings?It will be interesting to see what kind of numbers consumer companies report. Fancied companies like Jubilant Food or Titan etc are trading at very high valuations -- 150-160 times this year, assuming a 40-50% earnings growth and 80-90 times next year. These are unsustainable valuations. So if there is some disappointment with results, the selloffs in some of these stocks would be quite severe. So, that is one segment we need to be careful of. The other sector is the speciality chemical segment. This is where people need to be careful what they are buying into right now. But what people are not realising is that many of these are cyclical companies and a few years back, had very flat earnings for two-three years running. The kind of margins they have reported in the last couple of quarters might not sustain. This is one more segment where people should be careful. What is the outlook on the NBFC pocket?There are two categories of NBFCs; one category is Bajaj Finance which is in a separate category and then there are the rest of the NBFCs. Bajaj Finance has held on very well and has not really corrected but the rest of the NBFC space is down in the doldrums. The possibility of some positive rather than negative surprises which are already built in are high in many of the larger size NBFCs. Some of them are totally out of fancy today but there is value in companies like L&T Finance or Mahindra Financial. I am not sure when they will move by a large extent but I would think that downside is extremely limited and whenever positivity returns to this segment, we will see some of them do very well. Markets are excited about revisiting real estate stocks because real estate demand is coming back. But HFC stocks are not going higher. Isn’t that ironical? Doesn’t one compliment the other one?I think it does, but to some extent, the market could be right because the competitive intensity in the housing finance or the home loan business is very strong now. Housing finance companies at one point of time had a larger market share but now banks have jumped in. They have much more liquidity than the NBFCs and they can be much more competitive in lending to the housing sector, rather than the NBFCs. So, that is one part which is playing. There could be a squeeze in the margins of housing finance companies as more and more competitive intensity builds up. Loan disbursals for the housing sector might be moving up but HFCs are losing market share and that is reflected in their stock prices. What happens to good old HDFC Ltd?HDFC is facing very tough competition from the banks. While HDFC has not moved at all, some of the banks have rallied. SWhat is happening now is that almost on a daily basis, we are seeing selling from foreign investors and typically some of these stocks tend to be FII favourites and right now a large amount of flow is from the domestic investors be it AIF, PMS, mutual funds or retail investors. HDFC is not a favoured stock as far as that segment of the market participants go. That is why some of the stocks which are typically FII favourites could underperform in the near term, given the overall macro outlook for India. Some foreign investors are getting uncomfortable and pulling out now.
from Economic Times https://ift.tt/2VP1zaL
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