Vivek Mavani on why JSPL is a better bet than Tata Steel

Vivek Mavani, Independent Investment Advisor talks to ET Now about his favourites in auto, pharma, OMCs and commodity sectors.Edited excerpts: Does Tata Motors seem to be the haziest story in the auto pack right now? Yes and it is not that the street is just discovering that now! Tata Motors has been a rank underperformer compared to Nifty as well as other auto stocks in the last three years. That stock has either not given returns or has been in the negative in last 12 to 18 months.We can see a change in growth trajectory in Bajaj Auto and some of the other companies but in Tata Motors, the uncertainty on growth continues. More than 80% of earnings come from the JLR but a big question remains on how sustainable the growth is for JLR in China, Europe or US. The tariffs war development may be a couple of months old, but the Tata Motors growth disappointment or underperformance has been going on for at least 8 to 10 quarters now.Among auto stocks, which would be your top bet? Please do not say Maruti. Among auto stocks, in terms of two-wheeler companies Hero MotoCorp and Bajaj Auto are the preferred bets . Otherwise, Maruti is a high conviction bet on declines. It has been on a slight downtrend where according to technical analysts, the supports lie. Fundamentally, in terms of valuations at about 80 times one year forward and about 16% to 18% growth being sustained for the next at least two-three years led by volumes, led by new product and variant launches, Maruti is a terrific story going ahead.OMCs were highlighted in trade yesterday. They have had a rough patch in the last six months. A good 25% to 30% odd correction has already played out in OMCs for the last quarter or so. Is there merit in nibbling into OMCs? OMCs had a dream run between 2015 and 2016-17 on back of low oil prices and lower underrecoveries/subsidy contributions. We are back to the scenario of five years ago with high crude prices and under recoveries and oil PSUs taking that additional burden because the consumer prices cannot be raised in line with crude prices. That is one side of the story. I would be neutral to negative on as far as the oil OMCs -- IOC, HP, BP -- are concerned. In HPCL, there is an additional complication of a merger with ONGC going through. That is going to cause some sort of disturbance in the stock price as well.How are you placing yourself in pharma? Vivek Mavani: I will break up pharma into three parts. Fortunately, all the three parts of pharma seem to be firing as far as the growth is concerned. If we look at the Indian pharma focussed on exports, they have had a rough run over the last two-three years on back of regulatory and USFDA and quality issues.The Halol unit of Sun Pharma getting certified a few days back is a huge shot in arm and a huge trigger on the export side. Domestic pharma has continued to consistently deliver earnings growth quarter of 15% odd, quarter after quarter, year after year.Cipla is a very interesting bet really. Among the midcaps, Cipla has no regulatory issues and a consistent growth story. Alkem and Ajanta Pharma are again interesting domestic consumption plays. The third leg which has been a rank underperformer over the last 12-13 years have been the multinational pharma companies. They seem to be coming back very strongly. Glaxo or AstraZeneca were forgotten names. I am sure an entire generation of young traders and investors probably have never even looked at some of these companies which were darlings of the markets may be 15 to 25 years ago. That segment seems to be coming back in a major way and I see lot of opportunities in multinational pharma as well.Do you have a call on Rites or Fine Organics? I have not really looked at Fine Organics. But the other IPO which is closing today, Rites is quite an interesting play. It is a consultancy business, asset light, with high return on capital, return on equity and generates free cash flows. It is also a debt-free company in the infrastructure consulting space. Major part of work is coming from railways and capex is being planned out over the next 5-10 years. Rites could be sustainable. It has a steady earnings growth story with the hefty payouts for investors going forward. Valuation too is also not very demanding. Rites is something worth investing in both in the IPO and on listing and the oversubscription numbers at the end of second day itself speaks about it.Coming on the commodities basket, is there still merit in looking at a Hindalco, Tata Steel as well as Vedanta at these levels? Commodities are an interesting sector. The China factor seems to be coming back but for a different reason. In commodities, I am not so bullish on Tata Steel or Hindalco but some of the other names like Jindal Steel and Power, which has a huge deleveraging story over the next two-three years. The gross debt would come down by almost Rs 15,000 crore from about Rs 42,000 crore of peak debt in 2017.In the next 18 months or so, the gross number should be around Rs 28,000-29,000 crore and driven by higher volumes which would jump from about 3.5 million tonnes to about 6 million tonnes by 2020. On back of higher prices, higher volumes, higher prices and a meaningful debt reduction, JSPL looks a better bet than Tata Steel. In the non-steel category, Hindustan Zinc looks attractive because zinc prices are still at elevated levels and Hindustan Zinc is quite an interesting bet with free cash flows, tonnes of surplus cash sitting on the balance sheet and expected hefty dividend payouts.When the Government of India will divest the 26% stake nobody knows but assuming that does not happen in the near future, just the earnings growth and dividend payouts are enough triggers for me.

from The Economic Times https://ift.tt/2Mf8FLE