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    3 stocks Pankaj Pandey is bullish on from auto sector

    Synopsis

    When you look at some of the auto ancillary players what we like is most of the tyre companies because one, I think when you look at both plus, the crude based derivatives that cost competent is 65 to 70% and both of them are looking soft to us

    Pankaj PandeyETMarkets.com
    Mahindra CIE structurally has been sort of looking good to us, so margin profile looks good.
    "What we really are not chasing at this point in time is the two wheeler space. I think at best you will get 6 to 8% kind of a growth, which is not really great enough growth even with some bit of a margin expansion because while some of the names like say Hero MotoCorp are trading at 12-13 times so valuations looks attractive but I think somewhere down the line are still holding ourselves, largely because the growth is still muted," says Pankaj Pandey, Head Research, ICICIdirect.com

    What it is that you are been handpicking when it comes to the auto space after having looked at the earnings?
    When you look at auto space, typically, what we like is more of the CV plus the PV combination. We like Tata Motors. We like Maruti and also Ashok Leyland because our sense is that one, on the passenger vehicle side while when you look at Maruti’s margin they have come in double digits, I mean that they used to be about 5% or even lower than that a few quarters back. So with raw material prices softening so that is another benefit what we are looking at along with that, the introduction of new models and the kind of capex so that is one stock which looks attractive to us. I think Tata Motors and Ashok Leyland largely because while April month numbers were softer but our sense is that next two years CV as a cycle should do well given the capex what we are seeing. So from that perspective, both the companies look good to us.

    What we really are not chasing at this point in time is the two wheeler space. I think at best you will get 6 to 8% kind of a growth, which is not really great enough growth even with some bit of a margin expansion because while some of the names like say Hero MotoCorp are trading at 12-13 times so valuations looks attractive but I think somewhere down the line are still holding ourselves, largely because the growth is still muted.

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    What do you think is more lucrative right now, autos or auto ancillaries? I know you just highlighted your opinion on autos but just if you had to make a choice?
    When you look at some of the auto ancillary players what we like is most of the tyre companies because one, I think when you look at both plus, the crude based derivatives that cost competent is 65 to 70% and both of them are looking soft to us. You have seen a good amount of 400 to 500 bps kind of a margin expansion for most of the players and typically, tyre has got a higher tonnage contribution from CVs. So we like Apollo Tyre, we like JK Tyre. We like the entire space. Besides that some of the other which we like is something like, say for example, Mayur Uniquoters, the company is guiding for good set up numbers for the next two years. They derive about 65% of their top line from the artificial or technical textile what they sell it to autos. Bosch is also looking good to us because see, the margins for Bosch has normalised to 132-13% odd so pre Covid levels margins have been achieved. I think dividend payout has been pretty good at 100% odd. And on top of that, I think we feel that it is beneficial of stringent emission control norms. And they have got good capabilities of the new age alternate fuels, including EVs.

    I also wanted your take about IT and Infosys specifically because today as well, there is a note coming in from JP Morgan, who are cutting the target price further because they are expecting there is going to be disappointment in Q1 and after Q1 they are expecting another downgrade to come as far as guidance is concerned?
    Infosys is already down 15% compared to their long term PE multiples. Our sense is that, while near term things are still challenging because we still do not have much of clarity in terms of how the banking crisis could emerge or the US GDP growth rate and expense. But our sense historically has been that Infosys usually tends to revise their guidance as things improve. Probably that could take a few quarters. So till that time we do not expect much of a price performance but from a valuation perspective, like I said, it is quite attractive valued below 15% of the long term PE multiples. So price wise good but near term performance could still take time to happen and medium term probably yes, we would be bullish on Infosys.

    What is the outlook on Asian Paints in terms of what exactly you are expecting from the numbers?
    We are expecting about 10% kind of a revenue growth that will again be driven by 13% volume growth and you will see price decline. There could be a margin expansion, so we are expecting about 19% kind of EBITDA margin, but profit growth would look good on a YoY basis. But our challenge largely has been that while we have seen the input prices correcting, but we would not see a proportionate increase in the margins largely because of the entry of new player, so that is where we are a lot more cautious and mind you, it is a trade at 55 a multiple on a FY25 basis, so that is also not helping the stock much.


    Other than that, is there any other name that comes to mind with respect to the earnings reaction, something which is a high conviction buy for you guys?
    Well, yes. There are number of names which I have liked. One of them is KEC International. While margins were softer, our sense is that margins over the next two years should improve to 8.5%. Order inflow has been pretty good, so that is one stock which we are liking. The other one is Newgen Software. They delivered a growth of 25% compared to a guidance of about 20 odd percent. They are still guiding for a good double-digit kind of a growth for next two years.

    In fact, the medium-term guidance is nearly of a half-billion-dollar kind of a revenue from less than thousand odd crores, so that is another stock which we have been liking. IDFC First Bank looks good to us. So, at 1.3 kind of ROA, our sense is that overall it could be a potential beneficiary of the decline or retiring of the high-cost deposits that could have a delta of about Rs 500 crores.

    Mahindra CIE structurally has been sort of looking good to us, so margin profile looks good. Margin profile for the parent is even higher to 17 to 19 odd percent and it is a forging company which is largely a play on the PV side, which is why we like this stock. I already highlighted Mayur Uniquoters, so that is another stock which we are liking.





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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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