3 stocks one can safely accumulate with a margin of safety: Devarsh Vakil

“The midcaps and smallcaps have corrected more in this fall compared to the largecaps. The froth which was there in the midcaps and smallcaps is getting corrected. A lot of stock specific opportunities are going to be thrown up after this correction and it is a good time for a long-term investor to start looking at individual ideas and pick for 2023,” says Devarsh Vakil, Deputy Head, Retail Research, HDFC Securities.

What does selling the market over the last 3-4 days mean for 2023? Going into the new year, amidst the correction, prices are becoming attractive. What does it mean for the following year?
There was a lot of leverage in the system and a lot of investors had become quite relaxed and lax about the valuations. I think this was warranted and it is clearing out the froth in the system. As per our estimates for FY24, Nifty on an aggregate is likely to earn about Rs 1,000-990 per share. So at around 18,900, 19,000. We were at the higher end of the valuation range. Now prices are becoming attractive. Around the 17,500 level, one should start looking at selective stocks.

The midcaps and smallcaps have corrected more in this fall compared to the largecaps. The froth which was there in the midcaps and smallcaps is getting corrected. A lot of stock specific opportunities are going to be thrown up after this correction and it is a good time for a long-term investor to start looking at individual ideas and pick for 2023.

What is your take regarding those individual ideas? You have listed 10 stocks which are stock picks for 2023 – ACC, Bharat Forge, IOCL, CPCL, Larsen & Toubro, PNC Infratech, PFC, RCF, SBI as well as Zensar Tech. If I had to ask you to pick one top bet, what would that be and what is your rationale?
Assuming that most of the viewers are retail investors and are looking for a higher-risk-higher-return kind of a pick, I would say smallcap, midcap stocks would be a preferred buy for retail investors.
These 10 stocks are a mix of largecaps and smallcaps. If I were to pick one stock, I will pick PNC Infrastructure Company. This has a current order book of about Rs 19,000 crore, which gives them revenue visibility of about almost 2.5 times their current earnings. They have recently monetised one of their HAM projects and there is a talk going on for the potential investors to monetise more of these assets.

We know that 2024 is going to be the general election year. Usually before the election year, the government would like to show some growth and that is where I am expecting a lot of allocation in the Union Budget towards the road construction sector. This company has its own in-house processes and is considered one of the best players in the road infrastructure, road construction company. I think at this valuation, it does make sense to gradually accumulate. We have about Rs 410 as our target for the year. It gives us a clear 30-40% upside from here.

I do not see too many public sector banks in your list. That was one of the best performing sectors of this year. Why are you not looking at anything beyond SBI?
We were bullish on public sector banks one-and-a-half years, two years back and from there they have already seen quite a bit of rerating. I think 2023 is going to be the year of stock picks. You cannot bet on a sector just like that. So, we have chosen SBI as one of our picks because it is one of the largecaps and the valuations are still comparatively attractive compared to other private sector banks. We are still hoping that based on the earnings growth, there is an opportunity to invest in SBI at sub-600 levels in this correction with the target of Rs 700 for a year.

The capex theme has just started. PNC infra, L&T, ACC are part of your top picks list. You clearly expect that theme to continue to do well?
Yes, I expect 2023 to be a year where the capital expenditure cycle will move in. The capacity utilisation has reached about 85-90%, domestic economy is growing, we are seeing first signs of credit growth, lot of public and private sector banks are showing double digit credit growth and that will spill into the engineering, construction, capital goods companies and that is why we have chosen companies like Bharat Forge, Larsen & Toubro and PNC Infra where the theme is that the balance sheet should be strong and have revenue visibility. The valuations are now coming into a range where one can safely accumulate with the margin of safety.