Auto Shares | L&T Shares: L&T May Not Meet Market Expectations; there is value in car stocks: Nischal Maheshwari

“I don’t see a strong revival in demand in rural areas. This may have been a very strong wedding season and that’s why we’ve seen these kinds of good numbers for the cars. We like cars because of the valuation and not because a strong recovery is forecast in the next one or two quarters,” says Nischal MaheshwariCEO-Institutional Shares, Center Broking.

What is your advice? Waiting for the dust to settle or maybe we can slowly reach a bottom?
It is best to let the dust settle now because the story in the market has now changed. It’s no longer about margins with this kind of inflation and interest rate hikes. We are now starting to doubt the growth. So let that determine what kind of growth is expected around the world and whether the US is headed for a recession, which will most likely be accompanied by aggressive rate hikes. So it’s best to let the dust settle and then sort it out.

The other view in the market is that the era of growth stocks may be over and now we need to look at value. Where would you identify value if the market were to fall further in this current scenario?
Value for a long time has been automatic. Most auto stocks have hit historic bottom – be it Maruti or Hero Honda. Maruti is still not very cheap, but Hero Honda is available about 12-13 times. So I think car is actually a space where you can find value.

How would you look at traditional energy 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 will be very close, or rather, we are over the hump in commodities. Corrections are likely for commodities. Coal might be a different case as we are in short supply in India and possibly coal prices will continue to rise and coal India could still do well.

On the power front, all utilities should not fare well in a rising interest rate scenario, but as there is a massive power shortage due to harsh summers, these stocks may continue to favor 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. Initially it got a bit stuck due to the issues with the former promoters and they took a little longer than the market expected, but this was to be expected. There is a lot of synergy in both LTI and Mindtree. They have the same kind of verticals and fit in very well. After the merger. they exceed a billion dollars in revenue and 40,000-50,000 people. So they are now in the Hoofdklasse.

So, in addition to the top four companies, they basically become the fifth major IT service company from India. Size has many advantages in this industry as they automatically qualify for $100 million plus deals. 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 the comparators – even a PSU like SBI Life is trading at 2-2.12 times the embedded value and of course private companies like HDFC Life are trading at 3-35-4 times. If you also look at ROEs, LIC is way ahead of all the others due to lower power. But at the embedded value, LIC is a steal at these prices. There is a very clear upside potential of 30-40% on this stock.

How do you view banking? I met a fund manager and he told me that all the sell side brokers are pushing bank names and that is one of the main reasons why probably no one is looking at that space right now?
I think banking is interesting. It has not performed well in recent quarters, but we need to be aware of two things. The positives on the banking side are that higher inflation will lead to higher working capital requirements for the companies and that would stimulate growth for the banking sector.

Also, higher interest rates would signal a rising interest rate scenario and bank valuations should begin to correct. I think that’s what’s happening. Yes, banking will show a better number in fundamentals, but valuations will take a dent and that is why we see the majority of banking not performing.

Hero MotoCorp, Bajaj Auto fared well after results based on nationwide sentiment. Where does Maruti fit at Rs 7,200-7,300 where price increases have occurred?
Most of them have not been able to fully withstand the cost increases. We see national stress not only for consumer durables, but also for FMCGs. It is seen in the results of Dabur and HUL. Basically people are down-trading.

So I don’t see a very strong demand rebound as far as rural areas are concerned. This may have been a very strong wedding season and that’s why we’ve seen these kinds of good numbers for the cars. We like cars because of the valuation and not because a strong recovery is predicted in the next quarter or two.

What do you expect from L&T in terms of the segmented performance and the kind of guidance they could potentially repeat, as well as their order intake?
Order inflow will remain strong, but execution will be delayed. We’ve seen a few of these companies come in and see lower execution and it’s not for that reason that execution has a problem; the reason is rising commodity prices and the end customer might say okay wait a few quarters because these are all big infrastructure projects of three to five years and one or two quarters doesn’t really matter to them.

Since these are all pass-through prices that most construction companies have, the end consumer might ask them to delay construction for a quarter or two and lower the prices of both cement and steel before moving on again. We are likely to see weak execution and therefore the revenue numbers may not really match the market’s expectations.

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