ICICI Bank, L&T are two top Diwali picks: Vikas Khemani

In an interview with ET Now, Vikas Khemani, CEO, Edelweiss Securities, shares his views on the market and picks up some cracker stocks for this Diwali. Excerpts:

ET Now: The market rally is witnessing the absent of retail participation. It has been purely liquidity-driven. What is your sense as to how we are likely to pan out for the coming years now?

Vikas Khemani: It was a sudden unexpected rally which was largely driven by liquidity. Also, the quarterly earnings have been very good again contrary to most people’s expectations. Retail participation has been very poor. While there are certain things which are positive overall in the environment from macro perspective and things are beginning to look good, one should not forget some of the challenges which will be ahead of us in terms of the election outcome and also the QE tapering that can come in the next year. So we have to form a view from that perspective.

The markets might consolidate for some time, but if you were to look from medium-to-long-term perspective, things are definitely positive. The markets on a valuation basis look good. As and when the recovery starts happening, growth starts coming and macro environment starts playing out, things will start looking good. Earnings growth momentum will start picking up in the next few quarters. If you look at from slightly medium-to-longer term perspective, there is a lot of money to be made even from here. Still bottom-up stock-picking would work. Lots of ideas are there where one could invest in money, if you were to look at from medium-to-long term perspective either on valuation basis or possible growth perspective. If you were to take away the memory of the recent past, you should look at the market from medium-to-long term perspective.

ET Now: In terms of individual sectors, capital goods has borne the brunt of a lot of fundamental problems, BHEL has continued to remain a big laggard from last Diwali up until now whereas the IT sector has shun on a few fundamentals factors. What is your opinion on these two sectors?

Vikas Khemani: The capital good sector has definitely seen the worst times in the recent past because of the capital expenditure or gross capital formation which went down to probably very low levels, maybe all-time low, coupled with the policy paralysis in the infrastructure segment. There was a huge problem for the capital good sector. But we think that things are changing, valuations are attractive and a lot of organisations are ready to capture this growth. As the economic environment improves, the investment cycle has to pick up. A country of this investment size cannot remain bad forever and we are seeing incremental small green shoots on that. If that happens, the delta could be very high because in market when everybody is pessimist or bearish on a particular sector and as the things start changing, things might not become rosy tomorrow itself. But as the things start changing, the market will take note of the rate of change. So I do believe that the capital goods sector from here on can do well. Albeit it will be in a slow and steady pace, there will be a lot of money can be made in the sector from here on.

ET Now: On a more fundamental basis from long-term view, it is very hard to pick and choose quality stocks that are guaranteed to give strong returns. If you had to pick two Diwali stocks, what is it that you would offer for our viewers?

Vikas Khemani: I would pick two stocks. One would definitely be ICICI Bank, which is partly based on our belief on the recovery in the banking sector. Interest rates are peaked out and credit growth has bottomed out and asset quality issues also have peaked out. So, as all these three issues start reversing, banking as a sector would do very well. And ICICI Bank, we feel, will be the outperformer in the banking sector because in the last three-four years, the new management has done a great job in terms of improving the CASA, increasing the retail loan profile and improving ROEs of the bank. Slowly the ROEs have improved from 8-9% to 14-15%. That looks good and the bank does not need to raise any capital in the near future. So, on all parameters, we think that ICICI Bank is all set to give good returns in the next 12 to 18 months.

The other stock I would pick is Larsen & Toubro. Our call is on the belief that the capital good sector seems to be coming back, plus L&T is the only player which is well-positioned to capture growth in the investment cycle. We have started seeing the recovery - the order book has just begun to expand. Quarterly numbers were very good. We think that quarter after quarter, it will start doing better and the ROEs will also start looking good. The management’s focus is to get the ROEs back. So I would not be surprised if this stock ends up giving 40 to 50% return in the next 12 to 18 months, which is a very decent return for a large pack. So I would pick these two stocks from this Diwali to next Diwali perspective.