Deven Choksey on midcap IT future and LTIMindtree

“This particular combination of Mindtree and LTI would possibly create a larger amount of possibility for the newer verticals that they would have. Gradually, this company could be winning some of the larger size contracts, which I alluded to, and that is where the investors would be more comfortable,” says Deven Choksey, MD, KRChoksey Holdings Pvt. Ltd

What is the outlook on the midcap IT counters or the entire tech space? What is the sense you are getting given the kind of moves that we have witnessed within this entire space of late and in particular with L&T and MindTree merger coming into effect?
Globally the scenario is changing for some of the larger IT companies. I think those larger IT companies are now winning contracts which are upwards of million dollars which at the same time is giving them a visibility of five to seven years. The likes of TCS, Infosys have been winning some of the long-term contracts which are giving a good amount of growth visibility to these companies.

Some of the mid-tier IT companies have been operating out of their own niche and they also deserve to be in that particular space, provided they scale up and that is where the LTI-Mindtree combine could register that particular claim, having got a niche in certain area of engineering made services that they have been providing.

I would like to believe that this particular combination of Mindtree and LTI would possibly create a larger amount of possibility for the newer verticals that they would have. Gradually, this company could be winning some of the larger size contracts, which I alluded to, and that is where the investors would be more comfortable.

Size wise, if they become the fifth largest company in the country, definitely they would be included in some of the larger indices including the Nifty and the MSCI eventually and that registers a good possibility for investors.

Where does Apollo Tyres win versus the others in the peer group?
Tyres are driven by the cyclicality of the business and that is where in some quarters, there is impact of high cost of raw materials and on profit margins. On the other hand, opportunity-wise, most of the tyre companies, particularly those operating in commercial vehicles as segment as well as in off road vehicles segment, are having relatively higher growth to talk about.

The valuation and realisation wise, this particular segment gives them a good amount of opportunity. More importantly, the improvement in the entire space is good for the growth in the demand scenario which could possibly be giving the visibility for the next three to five years.

In the last quarter, one has seen the impact of high raw material cost and the resultant impact on the margins. In my viewpoint, that particular scenario is getting over and we should be seeing relatively stable raw material prices and a stable margin returning for most of the tyre companies. Should one go for Apollo or Balkrishna? I think relatively the strength would be higher in case of Balkrishna going forward. Apollo has strength but Balkrishna, despite bringing down some of the guidance, is a good choice to make for long-term investors.

Hands down, the best sugar stock is Balrampur Chini. It was the best sugar stock yesterday, it is a buy today and will it remain the best sugar stock to buy tomorrow as well?
Yes, Balrampur Chini should lead the pack. Of course EID Parry along with Balrampur Chini would be the preferred choice and if one wanted to go down further, it would be Triveni. In all these companies, I am observing a few things. Apart from sugar and all the cogen businesses of steam and the power, there is the ethanol story.

Ethanol is becoming an extremely powerful story. Currently, from about 520 crore litres, they are doubling the size in 2024-2025 to around 1150 crore plus litres of ethanol. If that is the situation that we are going to go for, my take is that most of the sugar companies would have a relatively very sustainable business model which up till now, was not the case.

Sugar companies have always been driven with cyclicality of the business. Now with the ethanol story coming in, this is going to be a real case. Plus another important aspect, which is a silent aspect in this entire activity is, most of the green funds are looking at sugar companies. Also because they are a complete business, starting from agri to the end product, green funds coming to them will possibly result in a relatively better valuation for many of these companies.

So on one side, cyclicality is going away and on other side, investors with long-term investment coming in like green fund investors, would ensure that the stock prices remain relatively more steady and less susceptible to cyclicality like before.

Hospital stocks are niche businesses. How are you finding opportunity within this entire space?
Operational performance would certainly be strong and going forward, I do not see too much of a problem on it being maintained on a sustainable basis for these companies. My bigger challenge here is that valuation wise, they are not at all cheap. While they are not cheap and at the same time assume the capital intensity, I would rather believe that it would delay the return that investors otherwise would ask from investment in the stock. So one should be relatively more careful in picking up a stock where valuations are expensive.

I would rather prefer to go when the market gives a relatively higher amount of comfort on the valuation side and at that point of time, hospital stocks become a good choice for adding into portfolio for generating returns.