Expect CV sales to pick up in Q4, cautious on cement: Siddhartha Khemka, Centrum Broking

In a chat with ET Now, Siddhartha Khemka, Head-Equity Research Wealth, Centrum Broking, says looking at Tata Elxsi and Strides Shasun.

Edited excerpts


What did you make of the auto sales numbers?

Some of these companies that have reported numbers today like Maruti and Eicher Motors on the two wheeler side, have a waiting period of anywhere between two and three months. In some models, there are waiting periods as high as six months. So the sales that is getting reported now would be mainly on back of the bookings that would have been done earlier. Any impact of the current demonetisation would be seen in the future months, that is, maybe in Jan-March quarter.

However, segment wise, Maruti is a play where you could see lesser impact of demonetisation. Again Royal Enfield on the higher end of the two-wheeler segment could have a lesser impact. The higher impact would be on the general two-wheeler segment, that is, Hero and Bajaj, at least on a temporarily basis. The long-term structural trend, continues to remain positive for the two wheelers as well as for the automotive companies in the medium to long term.

The India consumption story is there. What this demonetisation will do is, it will get a lot of spending power in the hands of the general public along with the Seventh Pay Commission payouts which was expected to play out, the healthy monsoon that we had this year. So the phenomenon that we are witnessing is mostly the deferment of demand which could come up in the later months.

Do you think the CV companies have it in them to have a better last quarter in the current financial year?

FY16 has been a very good year for CV companies. So to that extent, we have been facing that high base impact for the CV companies. This year, the monthly volumes are getting impacted because of that. However, Q4 generally is a very high sector in terms of the infrastructure, construction space, for mining, for the overall economy. There is a time when lots of movements happen and we believe CV sales should pick up in Q4 compared to what we could see in Q3.

Your views on cement?

We are cautious on the overall cement sector. Petcoke prices have gone up sharply in the last couple of months. That, coupled with demonetisation, is likely to impact the overall construction especially in the housing sector. So that could have an impact in the Q3 numbers. However, the overall cement space has consistently done well. Again a structural story which continues to remain strong, the expectation going forward is that the government spending which has been good this year would continue going forward and the benefits of demonetisation should be used by the government in spending, increasing the overall infra spend.

In the cement space, somehow, the southern focussed companies have done well, the cement prices there have been relatively resilient compared to the northern players. At this point in time, one could look at some of the south-based cement players as a buying opportunity in any fall that is provided by the market.

What is it that you are recommending to your clients to do right now if you are indeed telling them to buy into anything?

We are recommending a few of the good quality companies that have corrected. One of them is Tata Elxsi. We have a target price of Rs 1884, which gives almost 50% upside from current levels. The company is in the IT space but not in the services space but in software development. It does embedded product development for companies in the automotive and the communication space. The stock price has fallen sharply in the last few months and that was mainly because of a slowdown in their topline growth. This was because Europe which accounts for bulk of their revenues got impacted because of Brexit and the slowdown related to the economies there.

However, despite that impact. the company is still growing at 20% on the top line front and the PAT is expected to grow at 25% compared to other IT companies where the top line growth is expected to be about 10-12%. The company has very good margins of 24%, no debt. Return ratios are very high at almost 40% and currently stock is trading at 16 times on FY18 basis.

The second stock that we are recommending is Strides Shasun, a midcap diversified pharma company. The key triggers are merger with Shasun has brought it into the top 15 Indian pharma players as it has re-entered the Australian market. It plans to focus on the front end in the regulated market to become an integrated B2C player which would help improve margins. So we have a buy rating on Strides with the target price of roughly around Rs 1300 which gives an upside of 22% from current levels.