PSU stock that can rally upto 30%

PSU stock Engineers India can rally upto 25-30% from current levels, says Hemang Jani, Equity Strategist & Senior Group VP, Motilal Oswal Financial Services. Edited excerpts:

Are there some names that you are tracking in the broader market?
We have seen very strong traction in the broader market, both from a year-to-date perspective as well as in the last one month. Midcaps have outperformed largecaps big time. Midcap indices are quoting 22-23% higher than largecap indices. There are a lot of expectations in terms of earnings and so one needs to be a little cautious.

We like Gujarat Gas because of the gas theme and the way volumes are picking up there. Apart from that, we like some opening up trades like ABFRL and Trent. As you see more positive news on the Covid front and the opening up happens at a broader level, you would see some of these companies doing well. Even companies like Varun Beverages should be very well-placed in the current scheme of things.

What about power stocks? What are your preferred plays in this particular basket?
There is a massive move across the power sector, whether it is Tata Power or Adani Power. Even equipment makers like BHEL have seen massive traction in the last few months. So our belief is that the power demand is pretty good and even before the lockdown the power demand was pretty strong. So I am not reading too much into that, but I think people tend to look out for sectors where the ownership is less. We like Tata Power because there is a lot of diversification happening on the solar part. Some issues which were there have been addressed. Tata Power has raised a lot of capital. We do not have any other names (in the power sector) at this point of time in our coverage.

What are your picks within the reopening trade?
Within the unlock trade, we would definitely go with Indian Hotels. Though it has been an exciting wealth creating story over the last five years, but most of the big hotels have been reeling under cash crunch because of debt and balance sheet issues. Bigger companies like Indian Hotels would be able to acquire few more properties in the next 3-6 months. From the perspective of balance sheet and acquisitions, these companies would do far better over the next 1-2 years.

Unlike the market where the current prices are far higher than pre-Covid levels, Indian Hotels is still available at a pre-Covid level of Rs 130-135. So this is a good level to enter for an investor.

The PSU pack has been an outperformer. What is your take on Engineers India?
This is an interesting PSU company to look at. The recovery was smart in terms of revenue and EBITDA in the fourth quarter. The overall operating leverage has led to almost about 48% kind of YoY growth in EBITDA. Given the kind of exposure that Engineers India has towards certain turnkey projects, oil and gas sector, etc, where we are seeing the initial signs of revival in capex, this company which is not that known to many people is extremely well-placed in the current environment. We have a buy rating on this company. We are looking at about 25-30% kind of an upside from current levels.