Neeraj Dewan on the best financial stock to buy for next 12-18 months

“I would prefer Bikaji Foods out of the two IPOs. .Medanta is doing well and the IPO is coming closer to what other listed stocks are trading at, maybe at a slight discount to that but still I think that once the inflation comes down, the food market is where companies will improve the profit going ahead. So I would go for Bikaji,” says Neeraj Dewan, Director, Quantum Securities

What is the best strategy to participate in this market wherein benchmark indices are nearing a new high?
We are definitely going to new highs but today, after the Fed meeting and the interest rate hike and the statement, it looks like there can be some pause around these levels. I feel that maybe we have to wait a little more to touch those new highs but then we had a very good domestic result season so far. There was an excellent set of results from the banking majors, some of the financial stocks like L&T and Maruti are coming out with a very good set of results from there.

Let us see for a day or two how it pans out in the market post the Fed Chairman’s statement. If there is a correction, it will be an opportunity for people who have been sitting with some cash to deploy. Financials is one sector where one can look at opportunities. We have seen a whole host of results and there will be enough pockets to put in money. I think one should wait for a day and two and see what kind of small correction or pause or consolidation happens post the Fed meeting.

Let us revisit some of your stock ideas which we have discussed regularly. The first one was HDFC Ltd. and that stock has done reasonably well but HDFC Bank has underperformed the Bank Nifty of late. With the merger going through, where is HDFC Ltd./HDFC Bank headed?
Basically the idea was before the merger was announced. Post that, some slowdown had to happen because when this kind of a big merger is happening, there will be a lot of questions about how the combined balance sheet is going to look like and then some bandwidth of the management gets absorbed in the merger formalities. It is a tedious and a little longer process.

I think that is what has played out on HDFC, HDFC Bank price action and the stocks have been slower than what other financials have done. But once this merger is through, it becomes a very strong company and they will still continue with a 15% odd growth going ahead. I am very positive and I think it is better to buy HDFC Ltd. because the merger ratio means you get HDFC Bank cheaper. I am still positive and if one has a little longer-term perspective, one should be buying the stock on whatever dips. The stock has definitely been one of the FII favourites. Whenever we see FII buying coming, like in the last few days, we saw FIIs investing in the market and so we saw a decent movement in HDFC, HDFC Bank.

I think that will continue. Whenever there is big money chasing you, larger stocks and HDFC and HDFC Bank should be among the favourites there.

Indian healthcare has become an important benchmark for global healthcare services. There are a lot of factors which are working for the hospital industry per se. What is your view?
I think post Covid, people have become much more careful about health and no one wants to take a chance now. Post Covid, we are coming back to other ailments and diseases which had been put on the back burner. Now, hospitals are able to focus on other facilities and other treatments are more lucrative for them.

Going ahead, the realisation will improve further and there is definitely more scope as far as even OPDs are concerned. They have different other facilities like medicines being available in the hospital and there are so many different variables where they can generate income and take out the required costs which are required in the hospital. I am still positive on the hospitals and going ahead also, I feel realisation and profitability should improve.

Would you go for Bikaji Foods IPO or would you go for Medanta?
I would prefer Bikaji Foods out of the two IPOs. .Medanta is doing well and the IPO is coming closer to what other listed stocks are trading at, maybe at a slight discount to that but still I think that once the inflation comes down, the food market is where companies will improve the profit going ahead. So I would go for Bikaji.

Did you use the recent selloffs to buy and enter any of those stocks?
Actually even after the fall that we saw in Delhivery or Nykaa, the stocks are still not that attractive on fundamentals. We pick stocks purely on valuations but if we do not get valuation comfort, we will not really look into the stock even if we miss opportunities like the good rebound in Nykaa, we really did not use this opportunity and I feel that there is still a long way to go and one needs improvement in the profitability. A couple of quarters of good improvement can make a case for buying something like Nykaa.

While the sector is booming, LIC Housing Finance’ set of numbers have turned out to be howlers. A lot of brokerages are calling it a bump not a trend and they believe that what they have reported for the quarter gone by is a one-off. But if I look at the 2 or 3-year trajectory of LIC Housing Finance, despite being a subsidiary of LIC, the company has disappointed?
Yes, I absolutely agree with you. We have always been very positive about the valuations but we always get this stock cheaper than other stocks. There are a couple of reasons. They have not been able to improve their ROAs despite their size. Their ROAs fall between 1-1.2 which is really not good as far as NBFCs like LIC Housing Finance is concerned.

They kept coming out with these bad sets of results even earlier . There have been instances of developer issues and some other issues. One has more opportunities in other housing finance companies which are doing much better than LIC Housing. I really do not think there is too much potential here till we see some major improvement happening there which is not likely very soon.

I try to understand what Vedanta is doing. What are they doing – merger, demerger, consolidation, spin off, global listing, dividend, debt repayment? Have I missed anything?
It is very difficult to gauge what they will be doing next but purely on fundamentals, I think aluminium, copper and zinc businesses have huge potential and going ahead also I feel that valuation wise, the stock is still not expensive and has potential.

I will say that one needs to be invested in something like Vedanta though what the management does next is anyone’s guess and there have been disappointments earlier from the management. They must have learnt their lessons from what happened two years back and now in the near future, there should not be something like that which is going to be negative for the minority shareholders. Purely on valuations, I still feel Vedanta is a good bet to stay invested in.

Tata Motors DVR has been outperforming versus the rest of the Nifty 500 for the week. There are a lot of theories doing the rounds. Have you been tracking it?
Basically yes. We were looking at buying Tata Motors because we feel that the stock has potential and whenever there is some improvement in China or the UK front. The domestic business has been improving. When we looked at both Tata Motors and Tata Motors DVR, the discount was substantial. It was close to 45-50%. Historically, we have seen that this discount should stay between 35% and 40%. I think the discount is getting narrowed and that is why we saw this run up in Tata Motors DVR and not Tata Motors. The discount is now closer to what it ideally should be.

Which is the best financial stock to buy for next one year, three years and five years?
If we are talking about shorter term, PSU banks still have potential. PSU banks have come out with 13-14% kind of growth last quarter and the management were still saying that they may grow at that level. I think they were also surprised or maybe they were not so sure about the growth and the growth came north of 15%, close to 17-18-20%. Credit growth is strong in PSU banks. I see some potential in stocks like Canara Bank or Indian Bank which are still trading at a discount to their book value. These are the ones in the short term.

Even in the private sector, banks like IndusInd Bank still trade at a good discount to the other private sector banks. I think that can be one stock which can surprise on the upside over the next one, one-and-a-half years.

It has been a while since we got a new idea from you. HDFC, Wheels India are all old ones
Right now, we are looking at stocks which will benefit from the commodity prices coming down. These are textiles, innerwear kind of stocks where cotton prices had really gone up a lot and they have corrected in the last quarter. They are on the way down and we can look at some of these innerwear stocks.

Lux Industries is one of them which corrected massively from Rs 4,300 odd levels to Rs 1,700. This quarter may still have some pressure because of high cost inventory but because it has taken some price increases, that will have some impact on the margins. But going ahead, even raw material prices will show the impact. I think that valuation wise, it is an attractive zone. So one can look at Lux Industries and a similar kind of stock which is into textiles, innerwear where there is potential to grow for the next one year.

Then why not buy Page? It is a market leader. They own the brand Jockey and have very strong return ratiosIt’s a stock which institutional investors also own.
Definitely Page Industries will also benefit but the beat which comes from the second players like Lux is the second one after Page is higher and the stock returns can be higher there over the next one, one-and-a-half years. If one is a long-term investor, you can stick with something like Page because even in the bad times, the stock does not correct the way Lux has corrected.

Over the next three to five years, one stays invested. Page may be the market leader and may still give better bets but over the next one, one-and-a-half years, purely based on valuations and the beta which can play, Lux may give a better return.