Gas utilities and aviation to do well over next 6-9 months: Harendra Kumar, Elara Capital

In a chat with ET Now, Harendra Kumar, Elara Capital, says a Indraprastha Gas, Mahanagar Gas and all the LNG stories for that matter, even a Gujarat Gas or GSPL will be forthcoming over the next six to eight months.

Edited excerpts


What is your view on the way consumption numbers have come out?

The auto pack has been extremely positive. That trend continues over to the next year mid point where the interest rates will bottom out. The two wheeler numbers are very good and Maruti numbers are extremely so. There is no valuation arbitrage at this point of time. They will keep tracking volume numbers and that is pretty much priced in

The biggest story currently is how the GST is going to change the market dynamics for staples or discretionary space. It is not so much about the tax rate but rather the movement from unorganised to organised which is the big story sectorally that one should keep watching.

If it is edible oils, cigarettes or some of the other staples or even air coolers, unorganised to organised is the big theme one has to watch for in the tax structure and how quickly does the market readjust to that.

So the debating point is whether it is going to be six months or eight months that is one, second you had a phenomenal monsoon, third is the state capex on the rural farm side is at all time high. We are extremely gung-ho on the rural economy bouncing back in the next two to three months. My case is stocks so far mispriced because of the rural slowdown, should start doing well because of this macro triggers. I tend to agree discretionary and staples will continue to do well at least till next year and there is going to be more money in the hands of the poor people in the forthcoming budget as well. So that trend continues to be extremely strong.

How are you positioned sectorally right now? What are your big bets that you think where money could be made and one could look at fresh allocation of capital as well for the next one year to come?

The one big theme that we have been keeping pushing is the gas utility space. If you see the environment in Delhi, following the signing of the Paris climate accord, the entire focus of the government is towards climate currently. The big debate we have is a lot of clean energy funds that are looking for opportunities in this space as well. So the immediate theme is the big upside for gas utilities. So Indraprastha Gas, Mahanagar Gas and all the LNG stories for that matter, even a Gujarat Gas or GSPL will be forthcoming over the next six to eight months. This trend continues and will be very strong up to the next year.

Aviation stocks should do well considering crude is structurally weak, there is double digit demand growth and a new aviation policy that is coming up. My guess is the stocks have consolidated over the last two years and it makes sense to own some of them out there. So. gas utilities and aviation will be stocks that I think will continue to do extremely well over the next six to nine months.

For the moment. it appears that the bad news is over for Lupin. They have got an EIR for their Goa plant, meaning their USFDA issues which affected their future pipeline is behind them. Do you think Lupin is a must buy?

Pharma stocks are not going to go anywhere, at least the domestic pharma companies which have a good market presence and exposure are not going to go anywhere in the next 12 to 24 months. So the ownership is actually dwindling and there are no takers currently.

So Lupin stands out better in their pecking order vis-à-vis others but if you are looking at a individual stock picker or as a stock, the upsides are limited. The risks are too high and in terms of opportunities where do you want to deploy your money on stocks where there is high growth and high rerating potential or somewhere where the sectoral focus is not there. The bigger theme is on the MNC pharma stocks. For that matter, a Sanofi or some of the other midcaps make sense. If you look at the new NPPA regulation where the government is talking about actually unshackling the regulation rule that will be a big trigger for pharma MNC stocks.

My guess is rather than focussing on domestic pharma stocks, one should start looking at some of the MNCs where they have a good product portfolio and pricing power will return.
That is where our framework of stock picking would lie.

Which is the strongest NBFC? Now you can choose between buying a gold NBFC, a consumer NBFC or a vehicle finance NBFC. Give me the top two names?

You can look at Repco Home Finance and Can Fin Homes. The whole context here is that the low ticket housing is uncompetitive. For that matter, it is uncontexted market space where banks actually do not go and the biggest opportunity of housing for all has just about kick started. The real impact of that will be felt in 2017 and 2018. So in terms of core growth, some of these small banks or small NBFCs will actually outpace the larger housing finance companies while they got repriced. I think there is no risk on growth or for that matter on asset quality. So we would stick to these couple of names that are well managed and the opportunity is very good. Of course Repco has some regulatory issues. In the interim, that should be an opportunity to buy if the price dips. Otherwise, structurally we see no issues out there with housing finance companies.

Is it a tough call between Tata Motors or Maruti? What would you choose?

India is the fastest growing market and you need to be aligned with the leader out there. There is a huge comfort in volume growth, margin and continuing growth that they have demonstrated and they can scale up to higher value products as well where the category expansion is going to be the maximum. You do not play Tata Motors for the local market you play it for the global market. The context here is Mercedes and BMW dividend yield is closer to 6% now. So if I am a foreign investor and I do not have volume triggers, I would prefer to play the yield. That is one context that we see from FIIs and whenever we pitch Tata Motors. So currently till this arbitrage in yield remains, I do not see the stock moving anywhere.

So how about just looking at the DVR? Do you think Tata Motor DVR gives a better entry point?

Yes. If there is a discount there. But clearly in terms of the absolute opportunity, in terms of valuation, the other two players are being preferred at the moment.