Safer to buy good quality largecaps on big dips; be selective in broader market: Hemang Jani

“Midcap as a space will give great opportunities but it requires a little bit of hard work in terms of where one would want to get into to make more sense out of it,” says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL

Seems people are buying the dip already. Would you say the worst is behind us?
The volatility, which has started since the last couple of weeks, is only intensifying and the good part about it is that we are seeing some buying or support around those important levels. But from a broader perspective, if you leave aside this volatility, incrementally things are not looking good.

Crude, commodity prices are up. Also March being an important month in terms of liquidity management with such a big IPO hitting us which will take away almost Rs 75,000 crore from the system and the fact that the numbers in the broader market have not been up to the mark, there is a margin pressure across. So yes we like the fact that the market has corrected and there might be opportunities in some of the largecap names but in terms of the incremental data points and the news flow, things are not looking that positive.

Given that crude spiralled to $96 to a barrel yesterday and, of course, overnight we have seen a bit of a cool off coming in, what happens to the crude sensitives? Does one stay away from them still?
Things are quite difficult for oil marketing companies because they are not allowed to take the price increase and divestment is also on the backburner and so things are not looking that positive. There might be a bit of pullback once the state elections are over and they start hiking prices. But structurally, it is not looking that positive.

Apart from that, the auto sector and many other users like cement industry and multiple industries where the raw material is going to be crude or crude derivatives, already things are becoming difficult. If the price is sustained at these levels, incrementally things are going to get adverse. We have to really remain a little more careful about what we are getting into because of the implications of the higher crude price and other base metal prices.

I believe your group has come out with a new research report on textile. Textile stocks have been doing so well but you have done an analysis about how the higher raw material costs are completely eating into the margins and the new demand.
Absolutely. In terms of the top line on the revenue growth in the markets and share gains, things are looking extremely good for the retail players, yarn players and integrated players also. But if you look at the margin picture because of the way the cotton prices have really shot up and because of the way other input prices have gone up, the margin pressure is seen across. If you leave aside Vardhman Textile and a couple more yarn companies, there is a pressure across the textile companies which is a little bit difficult to manage. But we think that given the significant market share gains that companies have been able to achieve on the export front, the situation is looking better and once we see a little bit of stability on the cotton prices, these stocks will do well. Within coverage, Vardhman Textile, KPR Mill and Indo Count are some of the names that we think are relatively better placed.

Any meaningful takeaway from this deal between CG Consumer and Butterfly?
It is a very interesting company. It is a smallcap company with around Rs 2,500 crore market cap and in the southern markets, in the kitchenware segment, they have a very good product range. Some of these large consumer companies like Crompton are essentially known for fans and some of the lighting related products.

They are trying to expand their product basket and also the distribution reach. In this scenario, acquisition would make a lot of sense. The only thing is currently Crompton has a cash on its book to the tune of almost about Rs 1,400 crore and probably they will have to shell out close to about Rs 2,000 crore. It remains to be seen whether they will fund that balance amount.

Are you getting a feeling that it is time to make use of that opportunity and the much needed correction which had completely eluded us in the last two years?
The fact that there is a severe correction in the broader market means technical health of the market is definitely getting a little better but there are one or two points which I would like to highlight; one is that after seeing such a big runup in the market both in the Nifty as well as in the broader market, people are still working with very high earnings growth expectations.

In that backdrop, we could possibly see downgrades over the next two or three quarters given the liquidity-related and margin-related issues and the fact that the rural side is already grappling with some sort of a slowdown so that is where I would really want to focus upon. I do not think there is any risk if one buys in the largecap space where companies are delivering good numbers, if there is a meaningful correction.

But at a broader level, one will have to be far more selective about what one is trying to get into. Just because a few stocks have corrected 30-40%, I do not think it would be a sensible thing to go out and buy because they have corrected and there is really some hard work in terms of what sort of upside in terms of earnings we are looking at what sort of valuations we are paying for it.

Would you say that this is a market where one could get better returns from midcaps and smallcaps case now?
A handful of companies could definitely deliver much better upside because of the nature of that particular segment but we have to do a little more hard work in terms of which companies we are really getting into.

There are pockets where there was a bubble – let’s say fintech companies and the valuations that some of the recent IPOs were getting was obscene. I do not see that turning in terms of their earnings at all for the next two or three quarters. So midcap as a space will give great opportunities but it requires a little bit of hard work in terms of where one would want to get into to make more sense out of it.