What changed for the markets in the last couple of weeks? A 5% gain coming in over the last 10 trading sessions or thereabouts? What exactly has changed?
Well, I think a few things. The mood in the US market has slightly changed and that is getting reflected across the emerging market pack. Whether you see the other Asian markets, they have been moving up as well in tandem with US markets as well as Indian markets. Indian market was definitely looking a bit oversold and some amount of recovery was warranted. And third thing which finally happened was that the inflation numbers came both in India as well as US and they were much better than expected. So improvement in inflation probably is indicating clearly that the need for hawkish monetary policy may not be there for very long. And that did cheer up the market again, both in US as well as other emerging markets plus India.
So I think a culmination of all these factors did the trick. Of course, we have to again and again pointed out that the market was oversold and some amount of short covering comes definitely when there is this kind of a situation.
And there is a possibility of change of direction. So we did witness that as well. Here on, I think markets at least in India will be focusing to a great extent on the corporate results which have started coming and will be coming in thick and fast in the next week.
What is your take regarding the auto pack because that also made a bit of a comeback in the week gone by? We saw an initiation coming in from Goldman Sachs on Eicher with a buy call. There was a positive note on Bajaj Auto as well with the news flow around the Triumph dealership etc. What is your take as far as how the two-wheeler space particularly is panning out and any favourites?
As far as the two-wheeler space is concerned, Bajaj Auto has been our favourite for the last few months. There is one main reason for that which is beyond what is happening on the EV and the Triumph dealership expansion. Bajaj Auto is unique in that aspect that they have a significant export business. And that export business was suffering badly over the last few quarters with what was going on in Nigeria. And with the Nigerian election happening, there was not too much chance of things changing fast.
But now that the Nigerian election is over, the new government is taking charge and the expectations are that the things will start improving and Bajaj Auto will gain back a substantial part of the export market which they had kind of lost.
And that to my mind is the trigger for Bajaj Auto to move ahead and that is why we were recommending Bajaj Auto. The other factor which is very important and I think should be noted is that amongst the two-wheeler companies, Hero MotoCorp is trading at the lowest possible multiple. And we have to remember that they have a lot of these entry-level vehicles, which depends on rural demand turnaround. Now, if we have a good monsoon and rural demand turnaround does happen, then Hero MotoCorp will probably see the fastest appreciation. But for an aggressive investor only, we will recommend they start buying into Hero MotoCorp otherwise, stick with Bajaj Auto.
When we see the week ahead, then the earnings season will be the key driver this time around because all these news related to the global inflation, rate hikes, seem to be factored in. So, on Monday, we will be reacting to the HDFC Bank numbers. So, what is your expectation from the banking space this time around? And now that we have seen a good rally in all these banking names or a recovery rather, then how do you see that the stock price movement from that perspective because the business updates I feel from all of these large caps or the small cap, mid cap names have been quite resilient and have been doing better. So, on the stock price, what is your expectation?
Well, I think from BFSI results, clearly bank results should be good. And as you rightly said, the business updates clearly indicated towards that. We strongly believe that the asset quality for pretty much all the banks are improving and that is kind of given. There is no surprise or excitement around that. The excitement and the interest is around the liability side of the balance sheet now. And we have seen banks getting beaten down if the CASA falls or the CASA ratio goes up. So, I think that is where the excitement is and the market will be very closely monitoring the liability strategy of the banks as things stand now.
Of course, the recoveries and the asset quality improvement will also be watched but that pretty much should be on expected lines. The CASA will be the differentiating factor. The liability franchise will be the differentiating factor going forward. And keeping that in mind, I think I have been talking about buying into HDFC Bank. The reason being HDFC Bank used to be attracting a different multiple, much higher multiple compared to its peers, ICICI, Axis and others. That was lost due to multiple reasons, over the last one, one and a half years but HDFC Bank is coming back and the way the numbers are shaping up, we believe that HDFC Bank will be in a better position very, very soon.
So, for an investor with one year time horizon, HDFC Bank is a bank to look at. The other bank which we are watching closely and is down and out at this stage is IndusInd Bank. Multiple reasons such as CEO getting two year extension, vis-à-vis AU Small Finance Bank getting extension of three years and things like that.
But fundamentally, it is a strong bank. It is doing good on ground. The ratios are improving. Management is also stable at this stage. So, considering everything, I think for a little aggressive investor, IndusInd Bank also can be a good bet.
What is your take on the pharma pack?
I believe that US pricing pressure is there to stay. It is not going to go out in a hurry. We prefer domestic focused pharma companies for quite some time and we will continue to prefer that. If at all we have to look at some of the larger pharma companies, we will look at companies which have a large pipeline and are much more resilient compared to the smaller peers. So we can recommend Sun Pharma at current levels and even Dr. Reddy’s. But otherwise, for a conservative investor, they should look at domestic focused pharma companies only.
What are the stocks that you have as your top recommendations at this point of time?
Well, two stocks for long term investors. One is Larsen and Toubro. There is a significant headwind and we see a significant upside from current level as well. The other stock which we like is in the life insurance space and we know life insurance got beaten down for multiple reasons, including changes in the budget, as far as certain category of policies, which was preferred by HNI’s for multiple reasons.
But the fact remains that fundamentals of life insurance business have not changed.
So we like SBI Life. We believe the kind of distribution through SBI network they have is unparalleled. They are improving on all parameters and I think the investors would do well to buy SBI Life at current levels with one year time horizon.
