Mayuresh Joshi on 3 stocks that can be bought on dips now

Mayuresh Joshi, Head-Equity Research India, William O'Neil, says: “We like the largish midcap space in the market. One stock we like is within the auto ancillaries and battery makers. On any pullback, stocks like an Exide or an Amara Raja should be viewed as buying opportunities. The other stock that we continue to like and which will be bought on dips os Pidilite.

What is the call on this gradual decline that one is seeing within the mid and smallcaps specifically?
Mayuresh Joshi: One needs to be a little bit more specific in the broader markets. They have run up quite significantly and I think the markets will now track two things. One, within this sector they are operating out on, what is the earnings trajectory expected for the sector as a whole and within that, how the largecap and the midcap names are expected to fare? Obviously, valuations are a tad bit on the higher side. They are moving and trading above key pivot levels quite significantly for a large part of the space and therefore one needs to be a little bit more selective when it comes to the extreme broader end of the market, particularly the smallcap space.

The focus areas that we probably have in India are either largecap or largish midcaps which we are looking at this juncture.


What is your view on defensives like IT and pharma and the top bets within those two categories?
Mayuresh Joshi: We have been very selective in both these spaces as well. Within the IT space, midcap IT has performed exceedingly well. The commentaries have been very-very supportive whether it be on the revenue growth front, both in constant currency or dollar terms or whether it comes to margins. So, they are expecting margins to sustain over the next few quarters as well with very decent orders still expected to continue even in lieu of lower discretionary spending happening both in the US and the European zone.

Having said that, we will be keeping our eyes open for any pullback that probably happens on stocks like Persistent and Coforge within the midcap IT space. Largecap IT largely had delivered a better set of numbers than what analysts were probably expecting and to that extent the multi-million dollar deals that one really expects to probably slow down a tad bit, that might be a reality for IT largecaps and they might struggle for the next two quarters related to that.

I think a base case scenario works out to be a very conscious recovery happening as the rate cut scenario starts happening in the US which is in the second part of the financial year. So, being very-very selective within the midcap IT space.

When it comes to pharma as a defensive pack again, the under-ownership a couple of quarters back was very stark. The expectations in terms of earnings beng relatively stable because a lot more launches specifically in niche categories para IVs are expected to come through for a few companies. Sun Pharma has a strong pipeline on that. Auro Pharma has a strong pipeline and so do Dr Reddy's and Cipla.

So, within this space, we continue holding on to stocks like Sun and Cipla in our global portfolios. But within the midcap stocks, Natco and Torrent Pharma should probably be kept on your radar on any kind of a pullback. They have got a specialised pipeline as far as para IVs are concerned. The EBITDA margins remain extremely strong.

There are no delinquencies as far as the plants are concerned and to that extent expectations of more launches coming in too the next few quarters with stability in margins which might mean or tend to an upward tick in earnings trajectory for the next couple of years as well. So, we continue holding Cipla, Dr Reddy's, Sun Pharma in our global portfolios. Any pullbacks on Torrent and Natco can be viewed as buying opportunities.

In the latest correction within the smallcap and midcap space, given that they have underperformed the index by 7 to 8 percentage point in the last couple of weeks, which are the names which are coming into the buy zone?
Mayuresh Joshi: We like the largish midcap space in the market. One stock we like is within the auto ancillaries and battery makers. On any pullback, stocks like an Exide or an Amara Raja should be viewed as buying opportunities.

The kind of expansion they are doing in terms of their lithium and ion capacities which are expected over the next few quarters, is going to drive up volumes as far as the electric mobility segment is concerned. Obviously, they are servicing both the OEMs and the replacement market as far as the internal combustion engines are concerned. So, to that extent, as this transition takes place towards electrical mobility, they will be well equipped on both these fronts. Both from an OEM perspective and the replacement market perspective as well. With very stable balance sheets, in spite of the expansions that are expected to happen, no excessive leverage is expected to build up on the balance sheet, which means cash flow improvement will be quite significant over the next few quarters as these milestones are achieved.

The second element obviously is a stock like Pidilite which we are continuing to like. The Q3 results with underlying volume growth at a robust 10%, standalone margins in excess of 25 percent, expectations of volume growth holding up for the sealant segment, the industrial paint segment and the construction paint segment as well which is almost 20 odd percent.

I think both these segments are expected to fire up quite significantly with the expectations of both real estate activity expected to remain very robust, repainting demand coming back very-very strongly and therefore the volume/value growth should be quite significant in the next few quarters.

Input costs have come off and therefore the margins should be relatively stable with more products selectively in a calibrated manner expected to get launched in the next few quarters and years as well. Pidilite and battery makers are something that we continue to like.