A lot of money can be made in financial stocks; 4 stocks to bet on: Rahul Shah

"TVS Motors has been one of the best performers in the auto pack. Eicher could be one of them going forward also. The risk reward in auto makes us play two bets – Maruti and Eicher. Both look very interesting for the next one year or so," says Rahul Shah, VP-Equity Advisory, Motilal Oswal Financial Services

What are you telling your clients after a 13% uptick in the markets?
It was a long-awaited uptick where the valuations were comfortable for a lot of stocks and we had a good rally. Still a lot of money can be made in the financial stocks. Most of the banks which reported their numbers were pretty strong and the commentary was also strong. My view is that the large private banks as well as PSU banks also reported a good set of numbers.

There is still some steam left in the PSU banks as well as private sector large banks like ICICI, HDFC Bank and PSU banks like Bank of Baroda and Canara Bank.

Financials is one sector which we have been very positive on and there should be a good rally from here onwards. The markets have seen corrections in the tech stocks and my view is that midcap IT companies selectively look very attractive. Though a lot of large companies are still trading above their 10-year PE valuations, select IT companies in the midcap space still look attractive not just because of the way they have been hammered, but also because at some point of time, the risk reward will be favourable.

For example, Tech Mahindra looks very interesting from here. The risk reward will be quite favourable from here. Beaten down names like Coforge and L&T Infotech are the two-three players which could be beneficiaries.

These are two sectors we have been recommending clients to build up on.

Natco Pharma has a blockbuster earning set. This is the first full quarter of the realisations coming in from the Revlimid sales and that is why the numbers are looking bloated. What happens when the Revlimid sales get normalised and from next quarter onwards does not show such a huge jump as is the case in the quarter gone by?
Natco Pharma’s earnings have been very volatile in the last few quarters. Obviously, this quarter had good numbers and going forward, we have to look forward to see how it normalises over the next quarters.

But looking at current quarters, the stock looks interesting and the valuation is also cheap. We have seen that midcap pharma tends to outperform the overall mostly largecap pharma. My sense is one should look at it. One should look at Natco Pharma from an investment perspective for the year or so.

Do you think Zomato, Policybazaar and Nykaa over the next 12 to 18 months will go back to the peak levels?
The highs that we have seen in these stocks will be historical for at least the next two-three years. Till the time they perform, they have drastically changed there and then only we will see those kinds of levels again. Everyone knew on the Street that the valuations which got hit on the markets were crazy valuations but the way the party was going on, it kept on doing well enough.

It does not look like anything is going to happen in this space and at least for the year or so, we will deliver. We will just stay here or there maybe more of a downward risk but the stock will do nothing in the next year or so. I am not a buyer in all the newly listed tech companies.

What is your view on Maruti? Is it a stock which could surprise given that they have made some changes in terms of their product profile?
The auto sector was an underperformer in the last two years and then we saw the bull markets also. Most of the auto names were underperformers. For the last three to four months, we had auto sales numbers month on month. We are seeing a lot of traction.

Secondly, passenger vehicles sales still dominate. There are competitors like Mahindra & Mahindra. We feel that in the listed space, Maruti could be dominant with the new launches which are coming up and we have seen a good response from Brezza which came out last month along with the Grand Vitara which is coming up and another one or two launches which may come in.

Considering that Maruti looks quite interesting from there, the risk reward looks quite reasonable. The downside could be a maximum 10% and upside could be at least 25% . My sense is one should have Maruti as a part of the portfolio.

Is there a mania in defence stocks? Not every defence company is going to hit a homerun. These are long gestation businesses and margins can be volatile. But everybody is excited about defence as if this is the new IT?
Most of the defence stocks have moved up. Post the Ukraine crisis, we have seen renewed interest in minds of investors to build up positions in the defence space. So be it a BEL or HAL, all of them have done well. I think there could be volatility but we still have to have some allocation in our portfolio as a defensive play rather.

My view is BEL remains the top bet in that sector. The volatility will be there and it could be a three, four-year play rather than a near term bet.

City Union Bank has been a consistent compounder. They are growing, they are delivering and now that largecap financials have made a comeback, could there be a reversal or change of heart in the mid tier banks also?
City Union Bank has done quite well but I will still be in favour of large financial plays in the listed space. Going forward, the largecaps will be increasing their market share. One should stay with the largecap banks rather than the small banks at this juncture.

Can Eicher Motors create a new category by bringing the price point down?
The important thing to note is the earnings revival in the auto companies. Where we see the earnings revival in the next two years will be the best. One of that is Eicher Motors. The earnings could be very good given the low base of last year but compared to this year and the next year, I think Eicher has done quite well and the entire auto sector is getting into a momentum.

TVS Motors has been one of the best performers in the auto pack. Eicher could be one of them going forward also. The risk reward in auto makes us play two bets – Maruti and Eicher. Both look very interesting for the next one year or so.