PNC Infratech and L&T make for good bets in infra: Sanjeev Zarbade

We have increased our EPS estimates and target multiples for the frontline IT companies from around 18 to 20 times to now 22 to 24 times , says VP - PCG Research, Kotak Securities.

IT and pharma once again back in action and taking the lead in the market as the banks continue to look a little weak for the moment.
In IT, it is a very strange situation wherein the clients of IT companies are going through pain and are spending more on IT. Plus, there is hardly any pricing pressure on the IT companies. These are the two very important observations that we have seen from the current results that have been coming from Infosys, HCL Tech and so on.

In fact, we have increased our EPS estimates for the current year. We have also increased our target multiples or the frontline IT companies from around 18 to 20 times to now 22 to 24 times. We remain quite positive on the IT companies and have raised target prices for most of the companies. In pharma, that sector has performed very well coming from severe underperformance of the last several years. In the last two months, they have done very well. At this point of time, there are hardly any pharma companies that have an upside in our coverage universe. So maybe the momentum could take them higher but from here on, we would be a bit cautious on pharma but continue to stay positive on the IT sector.

Where do you stand when it comes to the metals space?
In the last quarter, the realisations were under pressure in most of the metal companies since the domestic demand was hit because of the lockdown. They exported their way out of the trouble and as a result, the margins took a hit. What we are seeing is that metal prices have started to go up and in the second quarter, we will most probably see improvement in realisations on a quarter on quarter basis. At the same time, the cost pressures continue to remain benign. So metal companies will report good expansion in margin on a sequential basis.

Companies to companies, a lot of metal companies like Tata Steel and JSW Steel have stressed balance sheets and debt to EBITDA is almost five to six times. We prefer to go with the JSPL where the valuation is attractive and the leverage is coming down.

RBI has revised the gold loan guidelines to help borrowers and it is now at 90% odd. Is that beneficial for NBFCs?
I have not seen the guidelines very closely and definitely I am not an expert on the banking side. However, what I can say is that a lot of the gold lending companies that are in our portfolio have actually gone up and trading well above our target price.

Anyway, we would like to be cautious on gold lending companies at this point of time and cannot say much about the impact at this point of time.

What is your take on real estate and infrastructure? Are you seeing opportunity within these sectors?
We are not seeing much opportunity in the real estate sector, because discretionary spending will be under pressure and most of the individuals would be more concerned about their cash flow position over the next 12 months. So, we are not really bullish on the real estate sector.

We are very selective in the infrastructure sector. Here also execution is not really going very smoothly because of labour problems and order intake will also be getting impacted because the government will focus more on containing the Covid virus.

However, within the space, we like PNC Infratech, this is a company which has almost three times its revenue as order backlog and one of the few companies which has a net cash position on the balance sheet. For a construction company it is a big thing to have a very good balance sheet and so in the midcap space we definitely would like to go with PNC Infratech.

In the large cap space we would like to go with L&T. L&T is trading at very attractive valuations of almost 13.5 times its engineering and construction business. So these are the two companies that we would be recommending to clients.