Accumulate these 3 IT stocks for next 3-6 months: Devang Mehta

“There is a lot of pessimism and a lot of PE correction or a PE valuation correction for most of these businesses. We hold frontline IT companies like TCS and Infosys and L&T Technologies in our client portfolios. People should start accumulating these types of businesses for the next three-six months. The next two quarters would be crucial for these companies as things start to turn around.,” says Devang Mehta, Head - Equity Advisory, Centrum Wealth.

What is your outlook then on the entire IT sector? What would your top bets be?
In the last couple of quarters at least, there has been a bit of a demand setback in the IT sector, which has been factored in by the markets right now. Of course, the talks about recession and extended rate curve that is going to affect the spending in US as well as the state of the European nations right now – be it recession, be it slowdown, be it inflationary trends, be it interest rate hikes – all affect the fate of a lot of export-led Indian IT companies.

But of late, we have seen that the correction has been quite sharp though most of these companies have outperformed Nasdaq which is the mother market for these companies. Generally, there is going to be a shift in terms of a lot of these companies doing well at least in the second half of 2023, if not immediately, because once the trend changes, a lot of this is pre-empted by a lot of international companies which give orders to IT companies.

There is a lot of pessimism and a lot of PE correction or a PE valuation correction for most of these businesses. The frontline IT companies like TCS and Infosys and L&T Technologies are some of the companies which we hold in our client portfolios. People should start accumulating these types of businesses for the next three-six months.

Looking at the commentary in the next quarter, I think the next two quarters would be crucial for these companies when things would start to turn around.

Around the world commodity prices are going down, but sugar stocks are doing well. Any view on sugar as a commodity or sugar stocks?
Yes, generally we tend to avoid most of these cyclicals and sugar is one sector which we probably take pride in avoiding. Most of the commodities had a dream run over the last couple of years. Prices of most of the metal as well as crude as a commodity has also come down. So probably. trading moves can come in between.

There is some alpha for the people who are indulging in short term trading but for people who probably have a next two-three year view, there are a lot of themes emerging in the capex universe, in the banking universe. I would tend to sort sugar as a space as of now.

Would you want any other metal names in terms of commodities anything that you like particularly if not agri, agri commodities like sugar?
Some shallow cyclicality is there in some of the sectors. For example, I can put cement as a commodity in India. I know that it is not a metal or a commodity type of a thing but cement is one sector which will do very well, as will agrochem and specialty chemicals. But be it China plus one theme or India being extremely competitive in this space, the amount of capex that companies have done right from Aarti to Navin Fluorine to Deepak Nitrite to most of those companies who specialise in maybe fluorination or specialty chemical even agrochemical companies like PI Industries, have done some extremely good work over the last three-five years.

Most of these companies are going to reap the benefits of whatever capex they have done and most of these companies command good ROEs. My sense is that if one needs to be into shallow cyclicals, these are better companies than getting into pure play sugar and commodities, where there is not much competitive advantage.

Where do you stand when it comes to the capital goods space? Would you cherry pick an L&T within the entire space or is it a blanket positive call?
We have been very positive across the capital goods space as well as the ancillary or the proxy play which support power transmission and power distribution. It is also a proxy play towards India going into capex, greenfield and brown field projects.

Most of these companies are part of the universe but if you ask me what are the top companies we hold across client portfolios, Siemens is one company, where seeing the order book, we can understand the enormous opportunity that India presents for the next three-five years. It looks extremely well set for a good recourse in terms of the next three, five years.

The second company which comes to my mind is something like Hitachi Energy, a very important company, in terms of three to four segments, where it operates right from robotics to artificial intelligence to most of the verticals that the company operates in. It is getting into sort of a fast growth trajectory. So my sense is that there are ‘n’ number of opportunities in the capex space. One can play a lot of these corporate banks where we are seeing the sector expanding and credit growth happening. So to play capex, one can go for capital goods and ancillary play and secondly a lot of banks, even some of the PSU banks. We do not buy much of PSUs but these banks are also a proxy play for India getting into the corporate capex mode.

The government has slashed the windfall tax on crude. Do you have a take on the fundamentals here?
I think it is probably more or less driven by crude prices which have been volatile. Sometimes, we get that windfall tax cut and sometimes we get that tax hike. The stocks also have been behaving mostly on those lines. The key takeaway here is that the overall crude price trajectory seems to be heading down and commodities seem to be heading down. So it is a good day for India, a good day for people who are buying commodities and raw material pressure will also ease off.

But simultaneously. somebody who wants to take a deep value bet the companies, the OMCs also present a good opportunity but as I see, they always carry that sort of a risk and that is why they trade at low valuations because they are completely dependent upon not only the price trajectory of where the crude moves but on the government policies as well. As a policy statement, we generally try to avoid these types of businesses but somebody hunting for deep value dividends could take some exposure but we generally tend to avoid it.