Lalit Thakkar, director- research and fund manager, Angel Broking does not see the Sensex PE (price-earnings ratio) getting derated from the current levels of around 18 times the FY09 earnings.
Lalit Thakkar, director- research and fund manager, Angel Broking does not see the Sensex PE (price-earnings ratio) getting derated from the current levels of around 18 times the FY09 earnings. The growth projections for the next three years are very robust, he says. Thakkar spoke to N Sundaresha Subramanian about the ‘hive-off’ bug, boiling oil and other stories that interest him. Excerpts:
Any particular space that interests you in the current markets?
Infrastructure sector is one sector we like. Currently, infrastructure spending is 3% of GDP. And the government is talking about $450 billion in five years. That is 9% per annum. The potential is immense. That is why we like the sector. A caution is that profitability in the business is not very high. The maximum ROE cannot be more than 16-18%. But still, because the growth is immense, cherry picking needs to be done.
Any specific stories within this space?
The companies we like are the ones with good order book positions and available at reasonable valuations in terms of PBV (price to book value). We look at PBV because capital is important to drive these businesses. Companies which have good order book position should be in a position to dilute their stake, infuse more capital to grow exponentially. Madhucon Projects and Pratibha Industries are stories which interest us.
Do you like IT stocks now?
We like IT stocks. They are available at PE of around 11 times. Sensex PE is around 19 times. ROE of Sensex companies is around 20%, growth is around 15%. Now, compare this with the IT companies. Their growth is higher than Sensex, their ROEs are better and they should command better valuation than Sensex. This sector should get 20% higher valuation than Sensex. But, due to the rupee overhang, they are available lot cheaper.
What about pharma sector, which also has taken a beating?
Pharma sector looks interesting. It is a good defensive play. I don’t see the rupee appreciating significantly. Even if it does, these stocks have better pricing power than most other sector. Further competition is limited. It is not easy to enter this space.
Is there anything beyond the excel sheet that affects your decision on a stock?
Very important thing is to look at whether the margins are sustainable. Eighty percent of the businesses are commodity businesses. Those might be a buy on one-year perspective. But, there are a number of stories which are positive on a three-year perspective. One such story is that of gas distribution companies. Now, there is demand for gas, but there is no supply. But things are going to change in a year and a half. We like this space and we are comfortable with the margins of around 20%. We look at such stories where sustainability of the margin is for at least 3 years. That is why we don’t want to get into commodities.
There seems a valuation gap is building up between mid and large caps. Will the midcaps catch up soon?
Last 18 months, most investments are done by FIIs. So, large caps have run up. But, the insurance sector has grown a lot in last one and a half years. Investment corpus with the insurance companies is huge. They will be having a lot of time to invest in five-year stories. A lot of this money will go into midcaps. We might see quality midcaps going forward in the days ahead.
Does the oil boil worry you?
Weightage of oil in global GDP is just 4%. In a sense, it doesn’t have an overbearing effect. It might not be too detrimental. If we start trading at 21 PE, if the oil touches $100, then there might be some correction. Though it may not affect the bottomlines, sentiments can turn negative.
We see a lot of hiving off happening. What is your view on this? Is there double valuation in these companies?
Hiving can happen in industries where there is immense growth. If the growth is only 8-9%, there is no scope for management to dilute. If the growth is higher, then there is a need to infuse more capital. Then such hiving-off is justified and is perfectly alright. But one should look at the sustainability of the profits.
My advice is to buy the company at a reasonable valuation and not because there is a potential for unlocking. So, if the unlocking happens, then your stock will have potential to deliver much more. If the value gets unlocked, it would be an icing on the cake.
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}