Hemang Jani on 3 midcaps to bet on from next 12 months’ perspective

“From a midcap perspective, we like Metro Brands. We like the entire footwear story and this is one company which is delivering in terms of growth. Second is IDFC First Bank that we have been liking a lot. Third is Lemon Tree; the hotel space is going through rerating and within the smaller names, we like Lemon Tree. These are the stocks and themes we like from next 12 months’ perspective,” says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL.

What is the outlook on some of the IT stocks? Do you think it would be better to have a wait-and-watch mode in terms of looking at the results of the commentary before venturing into the stocks again even if it is the likes of TCS and Infy?
In IT, there was a sense that things are getting back to normalcy but the recent developments wherein HCL Tech said that there can be some concerns on the margin front followed by the Accenture numbers and the outlook, means we may go through a bit of a pain and uncertainty before things get back to normal.

So near term, for about a couple of months, we will have to really wait and watch and once we have a little more clarity from the management comments about how the outlook is and is there any additional risk to the guidance that they have already given out I think that will give you a lot more comfort. So for now, maybe the stocks should remain broadly in a range, but on a deep correction of more than 5-7%, we should be looking to add HCL Tech, Infosys and TCS.

The recovery that we saw yesterday was also being led by Reliance Industries.
Yes, in the case of Reliance, once this windfall tax part is eased out though since the crude has not gone below $75, certain components will very much remain there. On the GRM front, so far things are not looking that weak. People do want to add on to the names which have not really performed big time and we think that from a one or two-year perspective at current valuation, Reliance is looking quite interesting.

What do you think about LIC, a bull or a bear?
The insurance sector itself is coming back in action and we have seen a good strong move across some of the names like SBI Life, ICICI Pru and a few more. LIC numbers also have been pretty strong. There is an improvement in the VNB margins and so overall, we are positive on LIC and the insurance space, but we have to remember that some of these PSU companies go through their own periods of excitement and subdued performance. Somebody with patience can definitely look at buying LIC for a one or two as we find the valuation and the risk reward quite compelling.

The temptation for a lot of retail investors is that one should buy these stocks. There is a quick trade. Would you endorse some of these tiny toons or the mid tier PSU banks like UCO Bank, Allahabad Bank, even Central Bank and the Bank of Maharashtra?
The overall rerating has been quite strong for the PSU banks and nobody thought that there could be such a big outperformance but at this point, rather than looking at the valuations, we should understand how much of this valuation base rerating or growth base rerating has been priced in.

I am a little more selective over here and some of the names like Indian Bank or BoB are the ones we are more comfortable with. I would not want to go too aggressive across the names, particularly very small ones like UCO Bank. Maybe there can be some more upside but a large part of the rerating is behind us.

If you were to pick out one long-term midcap recommendation for next year, which stock would that be?
Within midcaps, Bharat Forge is something that we find very interesting.The recent investor meet was very encouraging. A large component of defence and revenue is going to contribute with high ROE and we think that even on the EV side, the company has taken a lot of initiatives. From the auto ancillary pack, this remains one of our high conviction ideas where we see upside of more than 20%.

The Hero Moto management is indicating that they may not always stay a two-wheeler company and that a prototype between a four and a two-wheeler is in concept stage. What is your outlook on this commentary and where your preference lies within auto?
It’s a little premature to take a call on that because most of these companies keep evaluating such options and we think that two-wheeler as a segment has remained a bit subdued. The only positive takeaway as far as we are concerned is that because the stocks have remained underperformers and the two-wheeler numbers are showing initial signs of revival, we might see a case of a good trend building over the next one year. From that perspective, Hero Motor is looking quite positive.

Let us have some ideas for next year?
From a midcap perspective, one of the names that we like are Metro Brands. The entire footwear story is something that we have been liking a lot and this is one company which is delivering in terms of growth. IDFC First Bank is something that we have been liking a lot. That is something that we can look at. Third is Lemon Tree; the hotel space is going through a lot of rerating, a lot of positive data points and within the smaller names, we like Lemon Tree. These are the stocks and themes that we like for investors from the next 12 months’ perspective.

Do you like Indian Hotels or anything else within the space?
Absolutely. I think Indian Hotels is something that has seen a very strong turnaround and if you look at the management commentary and the body language the additional triggers are going to come from the strategies like Ama Stays, Qmin, Chambers management contracts will contribute about 26% of operating profits by 2025. Next couple of years are going to be extremely good for Indian Hotels, which has not been one of the best wealth creators. If you take aside last one year, this has been a laggard and though it was a great brand, investors were avoiding that.

The way things have turned around and the kind of steps that the management is taking, we are extremely positive. We have a target of about Rs 390 for Indian Hotels for the next 12 months.

If you had to buy only one IT company, which one would it be?
We would go with an HCL Tech because we have a little bit of clarity on the guidance front. This has been one of the better performing companies along with the valuation comfort. Within IT, if I have to select one I would go with HCL Tech. There is a long upside in terms of the revenue growth, in terms of margins and rerating. The discount between Infosys and HCL Tech is also now almost 14-15%. That makes more sense to go with it.