Auto Stocks | L&T Stock: L&T may not meet market expectations; There is value in car stocks: Nischal Maheshwari

“I do not see that there is a very strong reactivation of demand in what refers to rural areas. This was possibly a very strong wedding season and that’s why we’ve seen these good kinds of numbers for cars. We like cars because of the valuation and not because a strong recovery is forecast in the next one or two quarters,” he says. Nischal MaheshwariCEO-Institutional Equities, Centrum Brokerage.

What is your advice? Wait for the dust to settle or maybe we could be slowly bottoming out?
It is better to let the dust settle now because the narrative in the market has now changed. It’s not about margins anymore with this kind of inflation and interest rate hikes. We have started to question growth now. So let that basically settle on what kind of growth is expected around the world and whether the US is headed for a recession, which it probably will be with aggressive rate hikes. So it’s 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 drop further in this current scenario?
The value for a long period of time has been automatic. Most auto stocks are at record lows, be it Maruti or Hero Honda. Maruti is still not very cheap, but Hero Honda is available around 12-13 times. So I think the car is basically a space where you can find value.

How would you view NTPC traditional energy stocks? You have done well; the cement has done well. How would you see some of these traditional sectors?
In the case of raw materials, with this type of inflation, the peaks are going to be very close, or rather we are overwhelmed as far as raw materials are concerned. Corrections are likely when it comes to commodities. Coal may be a different case because we have a shortage in India and possibly coal prices will remain high and Coal India may still do well.

On the energy front, although in a scenario of rising interest rates, all utilities should not do well, but given that there is a severe energy shortage due to harsh summers, these stocks may still be in favor of 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 be announced. It initially stalled a bit due to issues with old promoters and took a bit longer than the market expected, but this was to be expected. There is a lot of synergy when it comes to both LTI and Mindtree. They have the same type of verticals and they fit very well. Post merger. they are crossing a billion dollars of income and 40,000-50,000 people. So now they’re in the big leagues.

So apart from the top four companies, they basically become the fifth largest IT services company outside of India. Size has many benefits in this industry because they automatically qualify for deals over $100 million. This is the biggest synergy and there would be other synergies in terms of cost savings.

What is your perspective on LIC’s IPO? Is it a blind subscription?
I think so. If you look at the embedded value and comparative companies, even a PSU like SBI Life is trading at 2-2.12 times the embedded value and obviously private companies like HDFC Life are trading at 3-35-4 times. If you look at ROE as well, LIC is way ahead of everyone else due to smaller net worth. But at embedded value, LIC is a steal at these prices. There is a very clear 30-40% advantage in this stock.

How do you see the banking space? I met a fund manager and he told me that all the brokers on the sell side are promoting bank names and that’s one of the key reasons why probably no one is looking at that space right now.
I think the banking space is interesting. It hasn’t worked in recent quarters, but we need to keep two things in mind. The positives on the banking side are that higher inflation will lead to higher working capital requirements by companies and that would boost banking growth.

Also, higher interest rates would mean a rising interest rate scenario and bank valuations should start to correct. I think that is what is happening. Yes, the bank is going to show a better number when it comes to fundamentals, but valuations are going to take a hit and that is why we are seeing most of the bank is not performing.

Hero MotoCorp, Bajaj Auto have done well after results based on rural sentiment. Where does Maruti fit in at Rs 7,200-7,300 where price increases have occurred?
Most of them have not been able to make full transfers when it comes to cost increases. Not only from consumer durables, but also from consumer goods, we see that there is rural stress. It is seen in the results of Dabur and HUL. Basically, people are trading lower.

So I don’t see that there is a very strong reactivation of demand in what refers to rural areas. This was possibly a very strong wedding season and that’s why we’ve seen these good kinds of numbers for cars. We like cars because of their valuation and not because a strong recovery is expected in the next one or two quarters.

What do you expect from L&T in terms of segmental performance and the type of targeting they might come back to, as well as their order intake?
Order entry flows will remain strong, but execution is taking a hit. We’ve seen some of these companies come in and show lower execution and that’s not why execution has a problem; the reason is rising commodity prices and the end customer might say it’s okay to wait a couple of quarters because these are all three to five year big infrastructure projects and one or two quarters doesn’t really make much of a difference to they.

Since these are all transfer prices that most construction companies have, the end consumer could ask them to postpone construction for a quarter or two and let cement and steel prices decline before resuming. We are likely to see weak execution and therefore headline numbers may not match market expectations.

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