Automotive stocks | L&T Stocks: L&T may not meet market expectations; there is value in auto stocks: Nischal Maheshwari

“I do not see that there is a very strong revival of demand with regard to rural areas. It may have been a really strong wedding season and that’s why we saw those good numbers for autos. We like autos because of their valuation and not because of the strong recovery expected over the next one or two quarters,” says Nischal MaheshwariCEO-Institutional Equities, Centrum brokerage.

What is your advice? Wait for the dust to settle or could we slowly hit rock bottom perhaps?
It’s best to let the dust settle now as the narrative in the market has now changed. It’s not about margins anymore with this kind of inflation and rising interest rates. We have started to question the growth now. So let that basically settle the kind of growth expected around the world and whether the US is heading into a recession, which is most likely accompanied by aggressive rate hikes. So it’s best to let the dust settle and then go and find out.

The other view of the market is that the era of growth stocks may be over and now it’s time to look at value. Where do you identify the value if the market were to fall further in the current scenario?
The value for a long time has been automatic. Most auto stocks are at all-time lows, whether it’s Maruti or Hero Honda. Maruti is still not very cheap, but Hero Honda is available around 12-13 times. So I think automotive is basically a space where you can find value.

How would you view traditional NTPC power stocks. He did well; the cement did well. How do you view some of these traditional sectors?
In the case of commodities, with this kind of inflation, the highs are going to be very close or rather we are over the hump as far as commodities are concerned. Corrections are likely for commodities. Coal may be a different case because we have a shortage in India and maybe coal prices will stay high and Coal India might still do well.

On the electricity front, although in a scenario of rising interest rates, not all utilities are expected to do well, but given that there is a huge electricity shortage due to summers rigorous, these actions could continue to be in favor of investors.

What about the Mindtree-L&T Infotech merger?
When L&T bought Mindtree, it was only a matter of time before this merger could be announced. Initially it was a bit stalled due to the issues with the old promoters and they took a bit longer than the market expected, but that was expected. There is a lot of synergy when it comes to LTI and Mindtree. They have the same kind of verticals and fit together really well. Post-merger. they cross $1 billion in revenue and 40,000 to 50,000 people. So they are in the big leagues now.

So, apart from the top four companies, they essentially become the fifth largest IT services company out of India. Size has many advantages in this industry as they are automatically eligible for deals over $100 million. This is the biggest synergy and there would be other synergies in terms of cost savings.

What is your view on LIC’s IPO? Is this a blind subscription?
I think so. Looking at intrinsic value and comparator companies, even a PSU like SBI Life is trading at 2-2.12 times intrinsic value and obviously private companies like HDFC Life are trading at 3-35-4 time. Looking at ROE as well, LIC is far ahead of everyone due to smaller net worth. But at intrinsic value, LIC is a bargain at these prices. There is a very clear increase of 30 to 40% on this title.

How do you see the banking space? I met with a fund manager and he told me that all sell side brokers are pushing bank names and that is one of the main reasons why probably no one is watching this space at this time?
I think the banking space is interesting. He hasn’t performed in the last two quarters, but we have to consider two things. The positives on the banking side are that higher inflation will lead to an increase in working capital needs of businesses and this would stimulate the growth of the banking sector.

Also, higher interest rates would mean a higher interest rate scenario and bank valuations should start to correct. I think that’s what’s happening. Yes, the banking sector is going to do better on fundamentals, but valuations are going to take a hit and that’s why we see most banks are not performing.

Hero MotoCorp, Bajaj Auto did well after results based on rural sentiment. Where does Maruti fit in at Rs 7,200-7,300 where price hikes have occurred?
Most of them have not been able to fully take into account the cost increases. Not only consumer durables, but also consumer staples, we see that there is rural stress. This can be seen in the results of Dabur and HUL. Basically, people are down.

I therefore do not see that there is a very strong revival of demand as far as the rural sector is concerned. It may have been a really strong wedding season and that’s why we saw those good numbers for autos. We like autos because of their valuation and not because of a strong recovery expected over the next one or two quarters.

What do you expect from L&T in terms of segmental performance and the type of direction they could potentially reiterate as well as their order influx?
Order inflows will continue to remain strong, but execution is taking a bit of time. We’ve seen a few of these companies come in and show inferior execution and that’s not why execution has a problem; the reason for that is rising raw material prices and the end customer might say okay wait a few quarters because these are all big three to five year infrastructure projects and one or two quarters don’t really make a difference for them.

Since these are all prices passed on to most construction companies, the end consumer might ask them to suspend construction for a quarter or two and let cement and steel prices drop before resuming. We are likely to see weak execution and therefore early numbers may not quite match market expectations.


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