Bullish on Maruti, expect double digit growth for next 2 years: Pankaj Pandey

“Now with inflation softening and an overall expectation that interest rate hikes could probably be milder, risk-reward wise Bajaj Finance or NBFCs are looking relatively attractive. I think this is the time for them to perform,” says Pankaj Pandey, Head Research, ICICIdirect.com

Where is Maruti headed? Maruti is one stock where everybody is divided. Half the folks feel that it is a leader and doing the right thing, by not going into EV and focussing on the SUV market, The other 50% feel that Maruti is missing butter from the bread now. They should have moved into the EV brandwagon. If you are not in EV, then you are not in future business.
We have turned positive on Maruti largely from the perspective that the discretionary demand appears quite strong to us. There has been a good margin recovery from mid single digit to low double digits and our sense is that having played some of the things right in terms of CNG portfolio, they are doing better.

I think they are sort of slow in EV but it is not that they are going to be completely absent. From that perspective, it is a slow mover. But our sense is that it is a market leader and also there is the scarcity factor. Besides Maruti, we have M&M which has already rallied, while Tata Motors is still struggling with the issues on the JLR front

The volume recovery in JLR is still two quarters away. From that perspective, Maruti is looking good to us and that is why we have overall turned bullish on Maruti. Our view is that we will continue to see good double digit growth for the next two years and from that perspective, on a risk reward basis, it is looking attractive to us.

Any thoughts on whether or not you track Bikaji Foods? What did you make of the financials as well as the listing yesterday?
We have not been tracking this company. Vis-a-vis IPOs, we really do not chase stocks because overall numbers look good during IPOs and then stagnates over a period of time. We will wait for a cool-off to happen and probably after one year we start looking at these stocks on a serious note.

But having said that, in FMCG, we would continue to like traditional aggressive players like Dabur which has bought Badshah or something like Tata Consumer which is quite aggressive on food as the overall category. So we will still stick with traditional or previous names to play that kind of opportunity rather than from chasing IPO names.

Construction stocks like NCC, ITDC Cementation, a pure play like Ahluwalia, are still lagging. Everybody is bullish on machinery stocks, banks are lending to companies because they are doing capex but nobody is bullish on construction stocks?
What we also need to understand is that Q2 is typically a weaker quarter for most of the players and on top of it, the raw material prices have also gone up. That is why there was a bit of margin pressure for most of the EPC players, including the road companies. Now when you turn to the second half, our sense is one should turn bullish on a lot of these names.

So we are bullish on PSP Projects which is into building products and then also something like L&T or even road construction companies like KEC International or PNC Infra. From here on, we will see an order execution happening. The order inflows are also expected to be quite robust in the second half.

If one goes by the recent commentary from the road minister, I think this is a good spot where risk reward is quite attractive. In the second half, execution typically picks up. This is what we have seen historically. Most of these companies, especially road ones, are not really aggressive in terms of taking up projects where margins are low. So from that perspective, it is a good spot to be in. I will not be surprised if they are doing quite well in the next few months. We are quite bullish on that as an overall space.

Where do you see opportunity?
Last one year has been quite brutal for cement stocks. The cost of production has increased by nearly Rs 1,000 per ton on an overall basis and which is why, when one looks at EBITDA per ton, that would have come down from Rs 1,200-1,400 range to Rs 500-600 range or even lower for some of the players.

Now there is some softening of the coal prices that we have seen and there has been some bit of a price hike which is taken. Our sense is that you will see EBITDA per ton recovery – say Rs 200 to 300 per ton and largely that is there in the prices.

For further movement in the stocks, one needs price hikes post festive season which is what the companies have guided for and further softness in some of the raw materials.

Till that happens, largely from the bottom, some bit of recovery has already happened both in prices but for a sustained move, one needs a decent amount of decline in both costs and the higher realisation. We are still waiting for that confirmation before turning further bullish on cement.

At what point in time would you say Bajaj Finance is a cheap stock to buy?
It has always traded at six to eight times forward adjusted book basis. Compared with that, look at Kotak Bank which is trading about somewhere around 3.8 times. It is relatively expensive. Our sense is that up till now, banks have been doing well and NBFCs have continued to be laggard because interest rates have been going up and there was a fear that probably margins compression for NBFCs could be higher.

Now with inflation softening and an overall expectation that interest rate hikes could probably be milder, risk-reward wise Bajaj Finance or NBFCs are looking relatively attractive. I think this is the time for them to perform. It is still trading at a substantial premium to a lot of banks and that way, I cannot say what level it can come down to but within NBFCs, we would traditionally prefer B2C NBFCs rather than wholesale funded which is where Bajaj Finance fits the bill.