Auto stocks | L&T Stocks: L&T may not meet market expectations; there’s value in auto stocks: Nischal Maheshwari

“I do not see there is a very strong demand revival as far as the rural is concerned. This was possibly a very strong marriage season and that is why we have seen these okay kinds of numbers for the autos. We like autos because of valuation and not because of strong recovery being forecast in the next one or two quarters,” says Nischal Maheshwari, CEO-Institutional Equities, Centrum Broking.

What is your advice? Wait for the dust to settle down or could we slowly be coming to a bottom perhaps?
It is best to let the dust settle now because the narrative in the market has now changed. It is no more about the margins with this kind of inflation and interest rate hikes. We have started questioning the growth now. So let that settle around basically what kind of growth is expected across the world and if the US is headed for a recession, which is most likely with aggressive rate hikes. So it is best to let the dust settle and then go and figure it out.

The other view in the market is that perhaps the era of growth stocks is over and one should now look at value. Where are you identifying value if the market were to fall further in this current scenario?
Value for a long period of time has been auto. Most of the auto stocks are at their historic bottoms – whether it is Maruti or Hero Honda.Maruti is still not very cheap but Hero Honda is available at around 12-13 times. So, I think auto is one space basically where you can find value.

How would you look at the traditional power stocks NTPC. It has done well; cement has done well. How would you look at some of these traditional sectors?
In the case of commodities, with this kind of inflation, the peaks are going to be very close or rather we are over the hump as far as commodities are concerned. Corrections are likely as far as commodities are concerned. Coal may be a different case because we have a shortage in India and possibly coal prices will remain heightened and Coal India may still do well.

On the power front, though in a rising interest rate scenario, all utilities should not do well but given that there is a huge shortage of power because of severe summers, these stocks may continue to be in favour with the investors.

What about the Mindtree-L&T Infotech merger?
When L&T bought Mindtree, it was only a matter of time before this merger could have been announced. Initially it got stalled a bit because of the issues with the former promoters and they took a bit more time than what the market was expecting, but this was expected. There is a lot of synergy as far as both LTI and Mindtree are concerned. They have the same kind of verticals and fit in very well. Post merger. they are crossing a billion dollars of revenue and 40,000-50,000 people. So, they are in the big league now.

So besides the four top companies, basically they become the fifth large IT services company out of India. Size has a lot of benefits in this industry because they automatically qualify for $100 million plus deals. This is the biggest synergy and there would be other synergies as far as cost savings are concerned.

What is your perspective on the LIC IPO? Is it a blind subscription?
I think so. If one looks at the embedded value and at the comparative companies– even a PSU like SBI Life is trading at 2-2.12 times embedded value and obviously private companies like HDFC Life are trading at 3-35-4 times. If one looks at ROEs also, LIC is far ahead of everybody else because of a smaller net worth. But at the embedded value, LIC is a steal at these prices. There is a very clear 30-40% upside on this stock.

How do you look at the banking space? I met a fund manager and he told me that all sell side brokers are pushing banking names and that is one of the key reasons why probably no one is looking at that space at this point of time?
I think the banking space is interesting.It has not performed for the last couple of quarters but we have to take cognisance of two things. The positives on the banking side are that higher inflation is going to lead to higher working capital requirements by the companies and that would push the growth for banking.

Also, higher interest rates would mean a rising interest rate scenario and banking valuations should start correcting. I think that is what is happening. Yes banking is going to show a better number as far as fundamentals are concerned but the valuations are going to take a knock and that is why we are seeing most of the banking not performing.

Hero MotoCorp, Bajaj Auto have done well after the results based on rural sentiment. Where does Maruti fit in at Rs 7,200-7,300 where price hikes have happened?
Most of them have not been able to take full pass throughs as far as cost increases are concerned. Not only from consumer durables, but also from FMCGs, we see there is rural stress. It is seen in Dabur and HUL results. Basically people are down trading.

So I do not see there is a very strong demand revival as far as the rural is concerned. This was possibly a very strong marriage season and that is why we have seen these okay kinds of numbers for the autos. We like autos because of valuation and not because of strong recovery being forecast in the next one or two quarters.

What are you expecting from L&T in terms of the segmental performance and the kind of guidance that they could potentially go back to reiterating as well as their order inflow?
The order inflows will continue to remain strong but the execution is taking a bit of knocking. We have seen a few of these companies coming in and showing lower execution and it is not for that reason that the execution has got an issue; the reason is rising commodity prices and the end customer might say okay wait for a couple of quarters because these are all large infrastructure projects of three to five years and one or two quarters do not really make much of a difference for them.

Since these are all pass through prices which most of the construction companies have, the end consumer might ask them to hold off construction for one or two quarters and let the prices of both cement and steel ease off before resuming. We are likely to see weak execution and so top line numbers may not really match the expectation of the market.

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