Hunting for multibaggers? Look in these 3 spaces now: Digant Haria

“I would broadly like to break IT into two parts. One is the value part of the IT sector and the other is the growth part. By value, I mean companies like HCL Tech or Mphasis which really do not trade at very high multiples versus the past. These are the pockets where one would like to hunt for value because growth can really disappoint in a big way,” says Digant Haria, Co-founder, GreenEdge Wealth

Give us a multibagger idea if you do use the term?
Multibaggers generally happen after a rally as we have seen in 2020-2021. Multibaggers from today will come up later. It is just not possible for them to happen over a short period of time. But yes, the markets are definitely not saturated. We will find pockets which can become multibaggers over the next few years.

One can look at two pockets. One is the dairy sector and beverages space for small ticket items which people eat when they are out on the street.

Varun Beverages have done really well because of the opening up of the economy in the last one year and the distribution expansion which they did during the Covid period. I think something similar can happen in the dairy sector. We have companies like Hatsun, Dodla, and Heritage which suffered a lot last year because the economy was closed and the milk prices were very high.

Now demand is coming back in such a strong way that even companies like Amul and Mother Dairy, the elephants of the sector are growing at 20%. I think the next one year can be reasonably good, the cash flows can be strong, companies are trading at reasonable valuations and those are the spaces where if the thesis plays out over the next one or two years, a good amount of upside can come in that sector.

Secondly, VA Tech Wabag and the whole capex industrial space is a multiyear story. Maybe the ABB and the L&Ts of the world cannot be multibaggers because of the levels at which they trade but down the line there are like tens of stocks which you know supply small components like motors and compressors and pumps and bearings to this entire manufacturing boom. That is one space that we like and where we can hunt for multibaggers.

In terms of non-balance sheet financials, broking companies are trading really cheap especially the ones like say ISEC, Motilal or Geojit. If the markets do well and the broader market recovers, I do not see why these companies cannot do well. They are focussing on a different segment not the discount broking segment of a Zerodha or an Angel, but more on the wealth management the retail affluent wealth management kind of a model, I think they are trading really cheap so these are the places where you know upsides can be more and you know if somebody is holding it for three-five years why not use the term multibagger here.

Do you see defence and railways stocks as fads? Do you think one should be prepped and ready to stomach a 10-15% fall across the board and try and hold that through if we were to get a corrective mode?
Yes, absolutely because these are stories where the sector is going to grow at 15% or may be even higher over the next few years. The revenue growth is really there. The order books are good and so the macro story is in place. In the market, we always get overexcited about something and we take the next two-three years of earnings and try to evaluate it today. That has happened in defence and railways.

The corrections are definitely going to come. You have to take them in stride and if these companies keep on getting orders and delivering earnings, these corrections should be used as opportunities for those who have missed out on those stocks earlier. But yes, the sector is really going to do well and we have to have our list ready.

In railways, one can be more bullish on Texmaco or Titagarh Wagon than IRFC because IRFC at the end of the day is a government balance sheet management tool. It is not a company on its own. People can have these kinds of preferences but the sector tailwinds are really there. Corrections should be used to buy the stocks that you feel can do well.

As valuations have corrected quite significantly when it comes to IT, where can one find a good buy?
It is a tricky question because the IT companies derive their revenues mainly from the US and Europe or largely outside India. But outside India, we are not going to see those exciting days of 2021. For two more years, these developed countries will have to fight this inflation and the deglobalisation of supply chains.

I do not think this sector can very easily reclaim their old highs and I would just broadly like to break it into two parts. One is the value part of the IT sector and the other is the growth part. By value, I mean companies like HCL Tech or an Mphasis which really do not trade at very high multiples versus the past.

These are the pockets where one would like to hunt for value because growth can really disappoint in a big way. But it will be quite volatile and so growth stocks like an LTTS or Persistent will see more volatility. I would like to be positioned more on the value part of the entire IT ecosystem in India.