The pace of earnings downgrades slowing down: Alok Deshpande

"In terms of Sterling & Wilson or Federal Bank for that matter; I mean, these are what we bucket as value picks. In both cases you will see that the valuations are significantly below some of the peers that are there," says Alok Deshpande, ED, Nuvama.

Why do you think there is a compelling case to look at the small and midcaps because they have done reasonably well in the last couple of months, if I will say, three to four months they have shot up 50 to 60% in certain cases. And you are saying that a big move is actually which lies ahead?
If you just take a step back and look at how small and midcaps did in 2020 and 2021, obviously, we all know there was a big outperformance versus large caps. But 22 and now half of 23, generally the outperformance has sort of flattened out. And in fact, small cap index has actually underperformed Nifty by almost close to 20%. What we have put out in our note is that; yes, we are probably not at the bottom in terms of where valuation starts rolling rally etc. But we are more than halfway through that underperformance journey. So what we are suggesting to investors is one should start to look at select stocks and probably in two or three quarters time, we will reach a point where it will be a time to go all out on small and midcap. So our call here is we are sort of halfway there or more than halfway there. And the idea is to now start looking at stocks which have been beaten down etc. so that is the call that we have put out in this recent note.

I was going through your model portfolio and I got intrigued by a couple of re-rating candidates that you point out, Federal Bank as well as Sterling & Wilson. Could you talk to us about what is the thesis there and what kind of upside do you envisage on these names?
In terms of Sterling & Wilson or Federal Bank for that matter; I mean, these are what we bucket as value picks. In both cases you will see that the valuations are significantly below some of the peers that are there. And generally, what we expect is some of the triggers to play out. Like for example, in the case of Sterling & Wilson, there are quite a few orders etc. that are piled up so that should play through over FY24 and 25.

Similarly, in the case of Federal Bank the asset quality etc. are improving and compared to that we have not seen that kind of trigger playing out in terms of the valuations. So those are value picks and you will find some other similar names in that value bucket that we have put out in the model portfolio. But mainly, these are not necessarily buy and hold stocks what we put out in value bucket but these are stocks where some sort of impending trigger is there. And you know, that trigger can play out over the next 6 to 12 months probably.

Now, this one is seeing intense selling by some of the players in the market on the one hand, on the other hand regulatory changes also kind of hit their business model temporarily. Do you think it is that the valuation now, how attractive do you see the valuation of Max Financials?
The reason why it features in terms in our value bucket is obviously we are expecting that at some point of time over the next 12-18 months Axis will buy that incremental share in Max Insurance. And then, the whole play here is eventually when Max Insurance itself gets listed then that value will get unleashed. So after the regulatory headwinds that came through what you mentioned, I think this is one stock which is not really recovered after that. And if you look at some of the other stocks in the insurance sector, they have actually recovered not fully but at least some part of, so some partial recovery has happened. So again, it is a play where we are banking on a certain trigger, in this case a corporate action to play through and we really see those valuations to be very attractive here.

I also see a stock like Macrotech Developer in your list. Why are you preferring Macrotech over the other names, let us say Sobha, Prestige, Brigade etc. of the world?
We keep rotating between some of these stocks also within a particular sector. In the past, we have had Brigade and Sobha in our portfolios. Now, the reason why Sobha and Brigade were there earlier in our portfolio was that the IT sector was going through a very large kind of boom. And, obviously, these companies have very reasonable exposure to IT hubs like probably Bangalore or Gurgaon or Hyderabad. Now, the reason why we have Macrotech now, as I said, we want to play a much broader real estate play here, in terms of where we think that the interest rates might have peaked up. So, the idea was to go from slightly more IT centric to a slightly broader play here. So that was the only reason.

Ever since Phoenix Mills has spelled out their strategy of going deeper into tier-2, tier-3 and new malls have actually been coming up, Ahmadabad was a recent inauguration. The stock has not done too much, the previous high was closer to 1600 odd, how do you see the numbers panning in the next one or two years?
The numbers should be good and also do remember it along with the other stocks in the real estate space it was also affected by the whole interest rate hike cycle. So the reason why Phoenix Mill will feature in this list is again we wanted something which was a much broader play again in this case on the urban mall kind of side of it but you wanted to go away from real estate stocks which are leveraged to one sector so again Phoenix Mills fits that bill and hence it features in this list.

You have a lot of exposure to building materials whether it is in terms of PolyCab, KEI even Supreme Industries, Prince Pipes etc. What is the top bet if you had to pick one stock?
I think at this point of time it has to be PolyCab. And just to put some context to it all these names that you mentioned if you see this list you will see that most of them are market leaders in their respective categories. So we have this framework for this product which revolves a lot around category leadership of market leadership so that is the reason why most of these names are featuring here. But PolyCab I would say that between three, four names that you mentioned it features as our top pick here reason being obviously great execution what they have delivered over the last four quarters but also if you look at the general cycle in terms of how it is playing out in terms of private capex, in terms of power capex etc so it will be a beneficiary of that.

Plus, there is option value of their consumer or consumer electrical division which is currently not making any money but over the next two or three years if that is to turn profitable and deliver maybe 8-10% margin that is really a big kicker that will come, which I really do not think that the market is fully factoring in. So that would be our top pick here.