These 3 midcaps top Pankaj Pandey’s buy list

Pankaj Pandey, Head-Research, ICICIdirect.com, tells ET Now that from a shorter term perspective, he likes AIA Engineering, MM Forgings and NRB Bearings. One has to look across caps and see where growth is fairly comfortable, says Pandey.Edited excerpts: Goldman Sachs says correction provides a good buying opportunity in Voltas. and we have seen how the stock has performed in the past as well, a classic consumption theme based on consumer durables, how do you view the road ahead for Voltas?Voltas is chasing a fairly large opportunity. Now, the entire AC market is somewhere about 50-60 lakh odd and has the potential to grow 10 times from the current level. However, from a shorter term perspective, most of the AC or cooling manufacturers did not have a good season, particularly, Voltas.Another challenge for Voltas was that somewhere down the line, the inverter AC prices were not so high which again impacted them because they were banking more on traditional products and which is why I think this quarter was not particularly good for a lot of these companies including Voltas. If somebody looks at it from a structural perspective, then the correction is a good opportunity to buy. But if you are expecting something in a shorter term, that may not happen. So, structurally one should be positive on the stock which is what we have been but for the next three to six months we do not expect much of a price performance from the stock.Kickstarting the earnings season, what is the expectation from the big boy TCS? Will they match up to the price performance in the stock?Within the IT pack, TCS has been giving superlative kind of a growth and even this quarter we expect a dollar revenue growth of about 3.5% odd which will be one of the best within the tier-1 plays. Compared to that, what we expect is that some of the plays like Wipro and even HCL Tech in terms of organic growth may not be great in terms of numbers. My view is that with better delta of growth getting delivered by TCS, the outperformance will continue. The stock has been one of the best performing stocks in the last six months in the index. It is up about 38% odd and is trading at relatively expensive multiples compared to peers. My sense is that given the fact that the company has been winning big client deals, the growth looks far more sustainable. With currency depreciation, things are better for this company as well as the other players so it is a good tailwind for them. So, we would expect TCS to keep outperforming the rest of the peers.What about the valuations? TCS may outperform but the scope of outperformance could be restrictive because TCS is now almost 70-80% higher in terms of valuations compared with HCL Tech and about 50% higher in comparison with Infosys?The cheapest stock within the tier-1 is Wipro at about 12 times. For next quarter, the company has already guided for a sequential decline in revenues. The market is clearly favouring growth. A stock like Bajaj Finance has been relatively expensive compared to the peers. But it is one of the few stocks which has been growing in excess of 30% odd rate, including this particular quarter also. If you look at a stock like Coal India, there has hardly been any price performance despite the fact that the stock has been attractive for quite some time and offers good dividend yield. The one template which we have been looking at for quite some time has been growth. The stock is offering growth. The market is willing to pay premium for that. And that still stays with us.Where could the disappointment come in? Could it be banks? IndusInd Bank is slated to come out with its numbers up. Would you say it is going to be as steady a performance or is there room of disappointment?Private banks are expected to deliver good high teen kind of growth in terms of NII and a good double digit bottom line growth, including IndusInd Bank. What is playing out in a bigger way is that the entire PSU basket is ceding market share to these private players and that is why despite being slightly expensive, most of the stocks have been doing well, including HDFC Bank. My sense is that that structural trend will keep playing out because I do not see much of a hope for PSU banks in terms of raising capital and delivering growth on expectations of the market.What is currently there on your buy list? Where are you advising your clients to stick to midcaps? By midcap companies, I mean those market cap of below $5 billion?From a shorter term perspective, some of the midcaps which we have been recommending include AIA Engineering. The stock has been fairly stable in last six months. Another one is MM Forgings. Then there is NRB Bearings. In most of these stocks we expect a good double digit top line and bottom line growth panning out. In case of MM Forgings, we are sensing that the company has achieved FY19 numbers in FY18 itself. The growth has been fairly robust. These are the kind of stocks which we like. One has to look across caps and where the growth is fairly comfortable. These are the stocks one should be looking at.Which are your big bets in the auto segment?So, for example, NRB Bearing is not a direct auto ancillary but if you look at a bulk of their revenues are coming from auto side so about 33% of their revenues come from two-wheelers and another 20% from passenger vehicles and another 20% coming from CV side so it is a good indirect play on the entire auto as a space. There we have a target price of 215. A lot of these stocks, in fact the entire bearing space, has been looking very attractive to us.We have seen that this entire space has started growing in double digits and the commentary from the spend of the railways plus the outlook for autos as a segment is fairly bright and it is improving the prospects for these companies.Is there merit in buying Ashok Leyland because the CV cycle is turning around? But this is not 2018 news, this is a 2017 story. Is Ashok Leyland at the current juncture pricing in all the good news related to a turnaround in CV cycle?From a cycle perspective, till 2020, the outlook for growth is fairly robust. If we get a scrappage policy, the growth outlook beyond 2020 will also improve. Within the CV space, Tata Motors seems to be discounting and has been snatching away some market share from Ashok Leyland and that is why the stock has been under pressure. This decline is at a fairly good level from a structural perspective. As for Tata Motors, the way the company has been spending and is about to spend and the outlook for that is really not that much clear because the EV space is still an uncharted territory for the company. From that perspective, it makes better sense to go for Ashok Leyland rather than Tata Motors.

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