Continue to be long on select chemical, plastics space: Deepak Shenoy, Capital Mind

In a chat with ET Now, Deepak Shenoy, Founder, Capital Mind, says the rally is liquidity driven and fundamentals are yet to catch up with market

Edited excerpts:

The market seems strong, perhaps the fundamentals are not really justified. What do you make of this equity market?

From the last few days, the market has moved very fast from 9100 odd levels to about 9300 on the back of possibly a little bit of international news but nothing really spectacular. I believe most of this is driven by domestic liquidity and the fundamentals have not yet caught up. We have not seen exciting results. Some private sector banks have performed well but there will be impact on some of the large banks when they announce their results. This is because a) lower treasury income, there is relatively higher interest rates because of that and b) they are going to have to report NPA in a fashion that will reflect more of their true book. That is going to cause an impact on the financials. We have not seen great results in some of the cement companies although volumes have gone up.

What do you make of the rally in ITC, what is fuelling the optimism here?

ITC is a strange beast, it does not really rally quite much. It might be the move towards GST which will change some of the tax implications it always seems to have. However, I am not very positive about the tobacco business in the long term. I believe the governments will find a way to tax it because it is not something that is acceptable in the longer term.Probably it is momentum driven and not really due to fundamentals of the stock.


What have you made of the current rally in M&M going past 1340?

Things are moving. Even in VST Tillers, there is a bit of agro space move. The prediction of normal monsoon is propelling the stock forward. It owns a big stake in Swaraj Engines and Swaraj Engines has announced fairly good results. In fact, it was very impressive result today and that will reflect in M&M results going forward. Plus they have some of the forays that will probably show some action when they announce results which is in the defence space, a little bit of action in the engineering space as well. All of that put together maybe rerating M&M. It is still nowhere close to its all-time highs so one has to look at that in context.

What about telecom infrastructure and Bharti Infratel. Do you like the name because it has had a decent run?

It has. We looked at Infratel. It seemed to be a better bet than Airtel definitely but given where we are now, I have not done a lot of analysis on Infratel in the recent past. I do not have much figures but it is not long that stock and we are in the process of looking at telecom infrastructure as a play. We are not interested in telecom at all. I think the low prices are going to make life difficult for everybody. It is just going to be great to be a customer and not an investor in this business.

Let’s talk about some of the sectors that you are bullish on. You like the plastics and chemical space as well as some of the auto parts. Can you elaborate on that?

The movement from the unorganised to the organised segment is impressive. There are companies like Neelkamal and Supreme Industries which are playing an interesting role in this space. I think going forward they will see a PE rerating, they are going to see a significant jump in earnings as well.

In the chemical space, chemicals you have companies like Sudarshan Chemicals which operates in pigments, Tata Chemicals which has speciality chemicals and an FMCG play in Tata Salt which is part of Tata Chemicals and a number of other players. All these are seeing a rerating basically because their business has started to improve substantially and they were earlier getting PEs or 8, 10, 12 and now are getting rerated towards the 20s.

This is a move with earnings that we see as a positive in the short and medium term. On the auto parts industry, there has been a significant difference in valuation within the auto part segments themselves and also between them and the larger auto companies. While auto growth has been quite good, their margins have grown auto parts companies earnings have grown about 25 to 30%. Their PEs have remained in the 10-12 range. We are seeing a significant rerating. Sundaram Fastners has moved up 30% or more in the last two or three months, that is one of our picks. We are continuing to be long on number of companies. I would not take a lot of specific names but I like the sector in general.