ROEs, margins falling for Asian Paints. We’re bearish on it: Hemang Jani

US visa curbs in an election year were expected, unlikely to have material impact of Big IT, says the Equity Strategist at Motilal Oswal.

I want to go back to PSU stocks. Time and again they are giving us these false hopes, that they are cheap and people should buy them. But is it different this time? BHEL has moved up, BEL has moved up. Yesterday the price action even in Nalco and NMDC was strong.
It is not whether it is different this time around. It is about what are you really buying it for. The PSU space is a large universe, and you have a whole host of companies. On the one hand, you have something like oil marketing companies where we are seeing buying interest because of the kind of price increases that have been taken over the past two weeks and there is a sense that incremental margins from this would be much better and the stocks had corrected. So there is a lot of buying interest in that space. I think the action in BEL, BEML was partly because of the increase in defence spend and the fact that these stocks had actually corrected sharply.

These companies are actually profitable and there is a fair bit of visibility. Even in the case of NMDC, the interest has been because of the kind of pricing we have seen for some of the products and the fact that it is a high dividend yield play. Remember, for some of these PSU companies -- particularly Power Grid and few others -- the dividend yield is somewhere in the range of 6 per cent to 8 per cent. I think people would look at them from that perspective. There might be some more upside in terms of business improvement. We are also playing this momentum for last couple of weeks. Look at each company in terms of how the numbers, dividend yield etc. are going to shape up, and not just because they are quoting at a certain price point.

Asian Paints missed Street estimates. Profit dropped a meagre 2%. However, for Berger Paints profit decline was 6.5%. But again, it is not about the quarter gone by, it is about the commentary that the management projected for the future. What is it that you have made of the earnings so far and the commentaries handed out?
When it comes to Asian Paints, there is a disappointment because they posted much lower volume growth on a lower base. The thing is, in a Covid kind of environment it would be very difficult to figure out what kind of volume growth we are really going to see over the next couple of quarters. Our view on Asian Paints has been that over last 10 years, ROEs have been down from 40-plus to somewhere around 20-odd levels. The margins have been really going down, and the stock still quotes at very high premium valuations of 60 times. We are not positive on that. I think we have a ‘sell’ rating on Asian Paints. It makes sense to focus on companies where you see better growth visibility and a much better valuation compared with something like this.

What is your look outlook on IT, with the new set of regulations against immigrant work visas? Obviously, the tech firms have slammed that vis suspension and it is not spelling out good news for the IT space as a whole. Nasscom was very categorical as well in its commentary. How are you reading this bit for the IT companies?
Typically, when you have elections, you hear this kind of rhetoric and statements coming from the US. The way to look at it is a) till December, nothing is going to happen in terms of these visa restrictions etc. Most of the IT companies are pretty well placed in terms of current visas that they have, and the kind of people that they would want to deploy on the projects and at the ground level. I do not think any material change is going to happen that would lead to any kind of decline in earnings. We are not reading too much into the current developments. Overall, we continue to have a positive bias on some of the large names -- be it HCL Tech or Infosys. In fact, they have not really participated in this entire rally vis-à-vis the overall market. I think one should have a positive bias on these names and have them in their portfolios.