A combination of value and growth stocks should work in 2023: Neeraj Dewan

“Value stocks will continue doing well. Some of the PSU stocks which are still undervalued which have a good potential should continue doing well. Growth is also important. Even PSU banks, which at the beginning of this year or even mid of the year or even just before Diwali, were only value stocks, now have become growth stocks. We have seen growth picking up,” says Neeraj Dewan, Director, Quantum Securities

It has been a chilly year for HDFC Bank. Will 2023 be a great year?
Yes, I think even now it has started performing. When the FIIs started buying some weeks back, we saw HDFC outperforming. One thing that is particularly good about the merger impact is that despite the fact that they were merging, HDFC Bank was still continuing to grow. They grew at 11% even though the bandwidth was involved in the merger process and all the formalities still show that growth is happening.

Once the merger is complete and once they are back into full fledged concentration on growth and looking at the businesses 100%, you can see a much better performance going ahead. What happened post the merger announcement and the correction Of HDFC Bank stocks to lower levels of Rs 2,200-2,300 was an opportunity for a long-term investor. I continue to say that it will give you a good underperformance, if not very decent outperformance.

What is happening in sugar stocks?
I was in fact recommending sugar stocks in the last two, three weeks because I saw the movement which was happening in global commodity prices, sugar price. The price had touched $20 which was a year high, so far. Once that happens, we will see the performance happening domestically sooner or later and that is what we saw.

The new contracts could be happening at a higher price plus the ethanol story is still on. The GST reduction on ethanol will also help them. Plus, there is even a talk of some increase in export quota. If all that is happening and the stocks were still languishing after a decent correction from the May-June highs and are still quite low. Even now, there is an upside potential though one needs to be very specific on which stock to invest in sugar. There is Balrampur Chini, Dwarikesh Sugar, Triveni. Even now there is some upside potential left from the current levels.

Are you convinced about buying into IT yet?
I would wait for some more clarity on what kind of recession or slowdown we are talking about in the US. IT stocks are not as cheap as they were when we started talking about recession and they had corrected like Infosys, which had retracted to below Rs 1,400. That time it was attractive even on valuation. It was trading at below 20 times one year forward. So that was the time where you can still take a chance that in spite of whatever happens the valuations are great and it is a great company, great sector.

The stocks have run up and they are not at those kind of desperate valuations. I would wait and there are other opportunities in domestically focussed markets where I would lay my bets on. Once you get some more clarity or once you get any impact on the prices because of whatever recession talks are happening. we will again have a look at them.

Which are the stocks which have done really well for you this year and which are the stocks that have not done well in 2022 but which you were hoping will do well for you in 2023?
There are stocks like Action Construction Equipment, Ion Exchange, Godfrey Phillips, Kalpataru, JMC and Jindal Stainless. These are the kind of stocks which are mostly domestic focussed companies which have done very well based on infrastructure spend, construction and domestic growth.

There are also other stocks like Venky’s India, Vardhaman Textiles or Arvind Fashion which have not done that well because it has more to do with the commodity pressure which was there. I think that they are good companies and will do well once the commodity pressure eases and demand increases with a lot of people coming out and spending. Once the commodity pressure is down, the companies have used this opportunity in the last two, three years to get their costs down. They should do well over the next year.

What is the outlook when it comes to the Indian ed-tech companies? These were beneficiaries of the pandemic but have had a rough run and have seen a lot of wealth erosion as well. Now with a turnaround in the company's strategies, are there select opportunities here?
I would agree that there are select opportunities within the space. I would not go with the kind of frenzy we saw earlier this year and don’t think that frenzy is going to come back in those companies. They have to perform, they have to show results and profits for people to come back into those companies because new investors lost a lot of money in those companies. I think they learned their lessons and they lost a lot. But a company like Zomato, which has a good presence, and a model which is very difficult to replicate, has a presence on the ground.

They have also changed their strategy and are focussing on profit and these companies will definitely make money for the investors in the longer term. But one has to be very careful about where you are investing because there are some companies where business models are such that it may take a very long time for them to come back into profit and sustain those profits.

We talked about Trent a lot this year and it has given phenomenal returns of about 34% year to date, Do you track that?
I do not track that particular stock but I track that sector and I feel that because of what is happening with the footfalls and people returning to and spending in the retail space, is driving the growth there. I like Arvind, AB Fashion and even Siyaram Silk in a similar sector.

Since we are speaking about consumerism, Varun Beverages has really stood out with 140% return for the year. Your view?
Yes, the company definitely had potential but we had a sharp runup in the stock because of it getting included in the indices. After the runup, valuation wise, it has become a little stretched. I would say that it has huge potential with the kind of geographies they are adding and the kind of distribution network that they are adding. It is a good company but valuations wise, one should wait for it to consolidate and correct a bit if you want to take a fresh bet on it.

Where do you stand on Indian Hotels and the likes?
I agree that the cycle is not ending anytime soon. Right now, they are doing very well and the kind of travel which is happening and even business travel picking up day by day, work from home was expected to work for a longer time but it is not happening that way. People are coming back to offices, started to travel and that is going to increase going ahead.

Domestic businesses are doing well and that will also continue doing well. Plus travel for leisure is happening in a big way. Indian Hotels still has potential and if one is invested, should stay invested in hotel stocks.

What the year ahead holds for auto and which would be your top pick?
In the four-wheeler space, I like Mahindra & Mahindra. Autos should continue doing well and the commodity pressure is also coming down. The margins should also improve going ahead. In the case of Mahindra & Mahindra, new launches have been doing very well; their margins are also very decent and the return ratios are very strong.

So even with a good mix, it is still available at a decent valuation and not two-year forward. When you compare it to companies like Maruti, where Maruti has been little late as far as EVs are concerned and the price now has moved where valuation-wise, Mahindra & Mahindra makes more sense compared it to Maruti. So I would say that auto should continue to do well. Auto ancillaries should also chip in but Mahindra & Mahindra would be my top bet as far as the four wheeler space is concerned.

What about two-wheelers? There was underperformance. Will that change in 2023?
It is too early to say because rural spending is not really going up and that helps the two-wheeler space. We have to keep a track of that. Maybe it will take a couple more quarters before we get some more clarity. May-June is when we get some sense of the monsoon and what is happening on the agriculture front. I would say that two-wheeler space may still underperform as far as the larger autos is concerned.

For 2023, what would be at play – a combination of value or growth, only growth or value?
A mix of value and growth. Value stocks will continue doing well. Some of the PSU stocks which are still undervalued which have a good potential should continue doing well. Growth is also important. Even PSU banks, which at the beginning of this year or even mid of the year or even just before Diwali, were only value stocks, now have become growth stocks because we are seeing growth happening there.

We have seen growth picking up, we have seen credit growth picking up and some of them from a 0.5% adjusted book value, price to adjusted book value have moved to one but because growth is strong, the return ratios will look better and will continue doing well. It will be a combination as far as the next year is concerned.

The general consensus from most of the analysts is that there has been some deceleration when it comes to demand trends. What is your outlook and how are you looking at the valuations as well here?
Post Covid, it was pent-up demand which helped growth. After that pent-up demand is over, wherever discretionary spends are concerned, we saw prices going up because of the commodity pressure. I think the demand took a back seat there.

So valuations are still very rich but some of the stocks, some of the companies – for example Havells – have corrected and because margins going ahead should improve for them, one can be selective there and look at those companies. Next year, with the margins coming under control and improving a bit, as well as top line growth continuing which we saw even this year, the top end growth is not bad. It is basically the margin which is hitting them. If that corrects over the next two-three quarters, these companies can give a decent return in the coming year or one year or two years ahead from now on.

Are we missing something? 45% is no mean feat for a stock like Suzlon. It may be a low ticket stock but it is a very large stock in terms of the base?
I would rather not look at a stock like Suzlon because we destroyed so much wealth earlier there. Maybe some turnaround is happening there with the right issue. There may be some improvement but I want to be very sure when I am putting money in a company like Suzlon. You may miss that initial 50%-60% of whatever has happened but find out how the numbers are panning for them before you take a long term investment bet. For a momentum chaser, maybe there is some opportunity.