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    Dhananjay Sinha is gung ho on auto ancillaries & selective in capital goods. Here’s why

    Synopsis

    “One has to be fairly selective in the capital goods space, and hence our focus out here is more on domestic plays - companies that are feeding into domestic, defence plays, etc., and those appear to be more resilient than others. I am also circumspect and select, given the fact that valuations are fairly expensive at this juncture.”

    Dhananjay Singh is gung ho on auto ancillaries & selective in capital goods. Here’s whyAgencies
    “Even though FII flows have revived in last one-and-a-half months, the same has really not transpired into the IT space - the kind of buoyancy seen in other cyclical spaces such as capital goods, banking, industrials, real estate, etc,” says Dhananjay Sinha, Chief Economist & Co-Head, Institutional Equities, Systematix Group.

    What is this freshly renewed buzz around the auto ancillary space? Exide , Amara Raja Batteries, some of the tyre names as well are chugging along very smartly. Do they make for a good investment proposition?
    I have been overweight autos for almost a year now, and we have seen a good amount of momentum as far as the OEM sectors are concerned. All OEM companies have performed exceedingly well, and continue to do so, be it commercial vehicles, two wheelers or passenger vehicles. Gradually, people have moved into ancillary names.

    One, there is not much discordant between OEMs and ancillary. I think it is in sync with what is happening across the auto sector. We have had the benefit of improved volume growth from an OEM’s standpoint, especially for the commercial vehicle space, which saw considerable contraction during the post-Covid shock.

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    Two, we had anticipated commodity prices, especially metals and all to come off, and saw it happening. So, with that area of the market undergoing some correction, there is a positive spill over effect for downstream companies. Within that, we agree the auto sector stands out in terms of gainers.

    Three, the auto sector is also seeing improvement as far as semiconductor supplies are concerned.

    Cumulatively, all these have had a positive bearing on the auto sector. Generally, over the last two months or so, market momentum has been good, and there has been an add on sort of sentimental impact from a broader market standpoint as well for the auto space. We have seen interest from both, domestic and global investors in this space. Net-net, all kinds of positivity has been feeding into the auto sector.

    Credit Suisse saying that they have downgraded the ABB stock to an Underperform rating from Neutral and that is largely on the back of elevated multiples. Given that the downside risk can originate from the weak global economic cycle that is going to be a key concern, any views on ABB or some of the other counters within the space?
    The broader assessment for the capital goods sector, where ABB falls, is that there has been good traction as far as overall price realisation is concerned. A lot of these segments have gained from higher commodity prices and better realisations from exports as well as domestic markets.

    As far as consumables are concerned, we have seen some traction in the domestic market. Since the pandemic lows, this sector has been doing fairly well. ABB has done very well, and many other names in this segment, like companies that feed into the plant and machinery sector on the export side in particular, too have benefited. I would agree with the view that there is a downside risk out if commodity prices come off globally, given the concerns on the global economy.

    Various projections show that the world economy could halve in terms of growth in 2022 over 2021. In 2021, GDP grew at about 5.8%, and the same is expected to fall below half to about 2.7% in 2022, and subsequently slide to about 1.5% in 2023. So, of these global trades, especially from India’s standpoint, several capital goods companies who have been benefiting from better trade and global growth would be impacted, both in terms of volume growth and realisations.

    One has to be fairly selective out there and hence, we focus more on domestic plays - companies that feed into domestic, defence plays, etc., and those appear to be more resilient than others. I am circumspect and selective, given the fact that valuations are expensive at this juncture.

    Some of these penny stocks are actually gaining traction. In last 10 days, Reliance Home Finance has shot up 62%, Essar Shipping is up 40%, Relcom is up 30%, Aksh Optifibre up 25%, Dish TV up 24%. Is there reason to worry because typically when penny stocks start moving up, that is kind of an indication of exuberance in the market?
    If we look at the previous peak, somewhere around November, December or maybe January, few of these small caps corrected a lot, with capital goods, banking, real estate, industrials all correcting quite a bit. This happened because of global factors, such as tightening liquidity, which permeated into domestic tightness as well. During such times, the less liquid names tend to somewhat get hammered, and there could be significant correction. What is happening now, is that we have had some rebound since mid-June, resulting in all these sectors seeing a rebound from the lows.

    What is the outlook on some of those Adani Group stocks because they have scaled up in an orbit of their own?
    We do not cover any of the Adani companies, but my sense is that there is a valuation concern in this area, as these stocks have run up quite a bit.

    As the tide is turning for a lot of new-age tech companies, as they start looking at profitability a lot more seriously, would you bet on any of these names?
    The focus on earnings is going to be far more acute going forward, as risk-free rates are rising. If they continue to do so over the foreseeable future, new-age companies, which are valued more on future cash flows, etc, could come under scrutiny, likely causing a downside risk in such names.

    Where do you stand when it comes to IT stocks?
    We have been underweight IT, though I like this sector. There have been issues around valuations; We have seen valuations de-rate over last six months. Last year, IT and Metals were the two most best-performing sectors. This year, both have been laggards. Valuations have come off, but are still not equal to pre-COVID averages.

    Valuations are still 10-15% higher in the IT sector, notwithstanding the corrections the sector has seen. IT stocks did not really participate in the recent rally as much, as domestic interest in IT companies was lagging. Hence, even though FII flows have revived in last one-and-a-half months, the same has really not transpired into the IT space - the kind of buoyancy seen in other cyclical spaces such as capital goods, banking, industrials, real estate, etc.

    It does appear that there is a lack of local participation as well. I think people are concerned about a global recession.



    ( Originally published on Sep 06, 2022 )
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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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