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    5 IT midcaps that could give good returns

    Synopsis

    Wherever you put money in IT, it is going to give you good returns going ahead, says Dipan Mehta.

    Dipan Mehta-1200ETMarkets.com
    Within the IT space, stick to largecap companies and in midcaps, go for companies with a differentiated business model like LTTS, Tata Elxsi, Intellect Technologies, Ramco Systems & Nucleus Software, says Dipan Mehta, Founder & Director, Elixir Equities.

    Buy ONGC or stick to IT names?
    ONGC and similar companies need to be avoided. There would be very good trading rallies depending on oil prices, government action and maybe because of base effect or higher gas prices. But at the end of the day, these are not great compounding stories and once you start investing in the likes of ONGC, you tend to miss out on good quality secular growth businesses which could be in IT or pharma.

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    At least long term investors should be invested where there is a great scope for stocks to double, triple over a three, five-year timeframe. ONGC is certainly an avoid for me.

    On IT front liners & preferred pecking order
    One could buy in IT depending on your risk profile. If you are highly risk averse, then the likes of Infosys and TCS offer a good balance in terms of risk return. For more riskier plays, look at maybe an HCL Tech, Wipro and Tech Mahindra but across the board, wherever you put money in IT, it is going to give you good returns going ahead.

    Coming to midcap stocks, I would like to make a couple of suggestions; usual disclosure we and our clients are invested; we like businesses which can be differentiated compared to the overall IT industry. So we like LTTS, Tata Elxsi which focus more on design engineering, embedded technology. Those growth rates would be significantly higher. Also, we like product businesses. These companies have been ignored for far too long but now I think they are coming of age and should benefit from very high operating leverages. Intellect Technologies as well as Ramco Systems come to mind, Nucleus Software is another company which is purely into products.

    Within the IT space, stick to the largecap companies and when you want to dabble in midcaps, then the company should certainly have a differentiated business model where growth could perhaps be nonlinear in nature. That is how we are playing the IT companies at this point of time. If the markets were to start to drift lower or if there is a correction because of any global health related crisis, then software will be a good place to remain safe while the entire world figures out what to do with the pandemic and the vaccine and the spread of the virus.

    Nifty IT return of 11% vs Bank Nifty return of 1%
    They are two different businesses with different dynamics. IT has been a beneficiary of this pandemic where they have been able to get on with their business with hardly any disruption and in fact, they are seeing savings in costs because of lower travel and work from home and higher outsourcing.

    Banks, on the other hand, faced the brunt of higher NPAs because of the way the economy has performed and contracted during the lockdown period and there is uncertainty as far as their assets are concerned. There is uncertainty as far as their growth is concerned and a lot of smaller banks and NBFCs certainly have been hit. Banks are a direct play on the economy and the economy has not been doing well the entire 2020 and that has being reflected in the stock prices as well.

    If you are patient as far as banks are concerned once normalcy comes back, we are seeing a very different landscape in the banks and the stronger players with capital will be able to grow swiftly and gain market share. A lot of competitive intensity has come down in some of the popular products and that will get reflected in a lot of the bank numbers. We are quite pleased with the way some of the larger banks have been proactively providing for NPAs which will be linked to the global pandemic.

    Eventually those credit losses will be absorbed. Latest by the fourth quarter that is March ‘21 we may see banks coming back into leadership positions and providing good outperformance as compared to the Sensex and the Nifty.

    On real estate stocks & Godrej Properties in particular
    The overall sentiment for real estate stocks has improved because optically we are seeing many more deals taking place especially in Mumbai because of the stamp duty cut that is adding to the volumes which are going up over here. Elsewhere also, the overall trend for real estate is moving up especially in affordable housing. We have seen that there is a good amount of uptick in demand, prices also have stabilised. When investors want to buy into real estate having burnt their fingers in the past with bad quality stocks, they want to stick to the market leader, stick to the best quality company and that is where Godrej Properties comes in.

    With the consolidation taking place within the real estate sector, large companies like Godrej Properties are certainly going to be big beneficiaries and we can sense a slight shift in the business model where they are moving away from partnerships and joint ventures or are adding more and more land banks to their operations. That can certainly mean a higher margin of profit going forward.

    They are taking advantage of the lower prices as far as land is concerned, acquiring key pockets of land and then doing construction entirely by themselves and that is a very sound strategy per se although it is slightly more capital intensive. But considering the resources that Godrej Properties has, it is a strategy that they can pursue. Generally long-term, it is very positive on Godrej Properties. The only thing you have to compromise on when it comes to quality is the price to earnings ratio. It is very expensive compared to its peer group but that is how these companies tend to play out. Over a longer term, very positive on Godrej Properties but the overall view for the market is subdued and that is why I would like to wait and watch on any fresh acquisitions.

    On Tata Consumer
    Tata Consumer has been one of the most spectacular performers of 2020 and what a transformation this company has undergone with the acquisition of the consumer business of Tata Chemicals and the kind of thrust that this company has received from the top management of Tatas. They want to build this business into a much higher scale than it has and they are focussing on their power plan just now. They are open to a lot of inorganic action as well and we are hearing about the deal that they are talking to Café Coffee Day. It also has got a lot of value in subsidiary companies with Starbucks and that also eventually will get reflected in the stock price and the growth rates have been better than some of the peer group FMCG companies.

    It is maintaining or increasing its market share as it looks to enter into new segments in the food category and growth rates will provide more visibility going ahead. I am very positive on Tata Consumer and investors can remain invested at this point of time. Amongst the FMCG companies, we are looking forward to Tata Consumer results in the December quarter, considering the last two quarters were exceptionally good. We would like to see if the company is able to sustain its growth rates going ahead and what the management has to say in terms of penetration into newer categories. So very positive on Tata Consumer at this point of time and it is one of the safe, stable companies to invest in.

    On Wipro
    We are very positive on Wipro and what the management is saying is very refreshing. The CEO is looking at growing faster and the first moves have been very positive. In a way, the CEO has been quite lucky for the company and the sector as a whole because this pandemic has certainly given a boost to cloud computing and digitalisation and trends which would have played out over three to five years are now playing out over one year or less than that.

    Wipro has also been extremely aggressive when it comes to new deal wins. They have been lagging their peer group which is why their growth rates have been subpar but now they are correcting course over here and eventually over a longer period of time, Wipro because of its inherent strengths and its size and diversification and presence in most of the segments or verticals in the IT sector, should grow at equal or higher than the IT growth rates which other companies have been displaying and would certainly lead to higher earnings and better valuation.

    In terms of capital ratios, the scenario seems to be improving with the massive buyback which is under way. It is very positive on Wipro and I would prefer Wipro to some of the companies which have already done as well. There may be less risk in Infosys and TCS, but in terms of risk return, Wipro looks more attractive. That is how I would rate Wipro at this point of time and I think very positive on IT per se. The only one I would like to add over here is that in the event the global pandemic starts to get worse and we again see lockdowns and slowdown elsewhere, then IT will be one place where investors can certainly hide as we have seen in the earlier lockdowns.

    On Vedanta
    I do not understand the moves made by the Vedanta Group. At one level, the parent company is under tremendous stress and yet they want to go on acquiring shares of their own company and then they want to acquire BPCL as well. So their strategy is not very clear and that is clearly reflected in the stock price of Vedanta which is trading at a discount to its peer group. No doubt the base business of Vedanta, especially the zinc business, is exceptionally good. They are world leaders over there when it comes to cost and quality and clearly they have strengths over there but the group keeps on making many sharp moves. They acquire company. They divest assets. I believe they are also looking at buying Videocon.

    One does not understand the whole logic and how the fundraising will take place and with these kind of risk factors, I would like to avoid Vedanta completely. There are corporate governance issues as well with loans given by Vedanta to its parent company. When you have this kind of a confusion, it is better to just stay away. We have seen a good amount of rally in commodity stocks and there are better choices where there is a good roadmap, no uncertainties regarding capital spends or capital allocation and there is good scope for earnings growth. So I would like to give Vedanta a pass. But such news flow does tend to create very strong trading rallies and investors with a trading mindset can look at buying into Vedanta for a short term.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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