Hemang Jani on why he would avoid Tata Steel, go for HCL Tech, SBI now

“Talking about stocks that one definitely wants to be part of, IT and banks are the two sectors where we are seeing a strong traction. Having seen an underperformance by IT, in the next six to 12 months, things are looking pretty good and so maybe HCL Tech is something that we think is extremely well placed in terms of risk to reward. Also, negative on commodities space and Tata Steel in particular, says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL.

Which is the one stock where you have told your clients to sell and get out and which is that stock where you told them to buy and double up your positions?
Commodities is the space where we have been negative and we think that names like Tata Steel etc will not do well. The entire export duty cut has come as a positive surprise for some of the companies but things are slowing down globally and China is also having its own dynamics and concerns and one should definitely stay away from the commodity pack, particularly the global commodity companies. So Tata Steel would be at the top of my mind at this point.

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Talking about stocks that you definitely want to be part of, IT and banks are the two sectors where we are seeing a strong traction. Having seen an underperformance by IT, in the next six to 12 months, things are looking pretty good and so maybe HCL Tech is something that we think is extremely well placed in terms of risk to reward.

We did a management meeting with State Bank and I think what is coming out very clearly is that on all the operating parameters, things are looking much better. Credit growth has come off a bit from a high base but on an overall basis, things are looking good. So, SBI could be a stock that we will be extremely positive on.

If it is an Adani group FPO, that means promoters are selling down, money does not come into the company. But if it is a QIP or additional fundraise, dilution may happen but the money comes back into the company. What will make markets happy?
One important feature of Adani Enterprise and many group companies has been that institutional ownership is not significant at all. If you leave aside the LIC part, none of the other mutual funds have any meaningful holding in Adani Group names, which is definitely a factor that is not that good from a credibility or a perception point of view.

The management is trying to see that if they are able to do more meets and do a fundraise from the local institutions, even if it means that the promoter stake will come down, that will go down well with the investor community. This is something that we have to bear in mind but leave aside that, the way the group has gone about acquiring assets, creating debt with practically no parity on cash flow, it is definitely putting institutional investors away from it. We just have to see at what price they are able to raise it and who is able to participate in that so that there is more clarity on their structure.

Given the fact that a lot of these new age tech companies are being written off by the Street, do you think that that calls for a case for a lot more interest in some of the mid tier IT companies?
Some of the midcap IT names have shown a bit of a resilience and when we look at the numbers – be it MindTree, LTI, LTTS and Persistent Systems – many of these companies have delivered extremely good sets of numbers with some improvement in the margins. We think there is a case for some sort of a revival in the broader IT space and some of these midcap names also. We do not like the valuations of some of these names like MindTree and LTTS but selectively Persistent systems is something we would definitely be very positive on.

Which is the best defence stock to own now? Every defence company has a different kind of proposition, some are in ships, some are in aircraft, some are doing drones. For a medium-term investor, which is the best defence business to own?
We like two stocks -- one is Hindustan Aeronautics and here very recently, the management has given the guidance where there is an upgrade for FY23 – 26% to 27% versus 24% to 25% earlier. Given the way the entire dynamics have changed in the last one, one-and-a-half years because of the Russia-Ukraine war and the government policy of favouring some domestic companies, that is definitely a big positive trigger and this could be a story for next three to five years with intervening periods of lull because of the lower floating stock.

Maybe on a quarter-on-quarter basis, sometimes the performances do not come through but for those who have a slightly longer term view and want to allocate certain component of their portfolio, defence would be one important theme for longer haul. Both Bharat Electronics and Hindustan Aeronautics have a decent size, a fairly diversified product range and very good margin profile. These two names, we would definitely be positive on.

LIC is where everybody is trying to do whatever they can to convince institutional fund managers that this stock is cheap, every brokerage or every large brokerage has a buy recommendation on it, government has already made it clear that they are aware of the intrinsic value of LIC and they would like to create more value. LIC management transferred funds back to the P&L which changes the entire embedded value. Yet the stock is refusing to budge.
Operationally, they have done pretty well. If you look at this quarter, both in terms of gross premium collection, the new premium collections and the VNB margins, across parameters, they did well but typically when the company does an IPO and when many retail investors and large number of other category of investors participate and the stock disappoints, the supply create so much of an overhang that it takes a while for it to really come back to that level but I think in terms of fundamentals, in terms of operating parameters, it is looking definitely compelling.

If you compare some of the PSU banks, maybe around Covid period, people just did not want to look at that but when the turnaround happened, there was a massive re-rating. I think LIC also could have some positive impact over the next three to six months and more so, when it is close to the IPO price.

What is your take then on the entire cement space? Just today, there is a brokerage note talking about how a price improvement is expected and price hikes to the tune of Rs 15 to Rs 20 per bag have been seen in November. Demand is estimated to grow by nearly 6% to 7% in the second half. What do you favour within cement?
We have a positive view. Post Diwali, you are seeing a pick up in the activity and across major markets, we are seeing price increase and we are also seeing a decline in the petcoke prices which definitely would help the margin.

We like UltraTech, which is our top pick in the cement space along with the names like JK Cement where the overall growth visibility is much better.